Many people are charitably inclined and like to give money to churches or synagogues (among others) throughout the year. At The Center, we fully support these efforts, but are always conscious of the most tax efficient ways in which our clients can give to their favorite charities. One option that we often consider is a Donor Advised Fund.
In order to take advantage of this charitable vehicle, an individual must open an account with the fund, and deposit cash, securities or other similar financial instruments. By taking this approach, you can set funds aside--even if you aren’t sure exactly where you want them to go-- and still take the tax deduction in the year that the donation was made.
Who Should Consider this Strategy?
An example of where a strategy like this might make sense is if you are in your peak earning years, but approaching retirement in the next 3-5 years. You might need the charitable deduction more now than you would in retirement when your income would probably be less and your tax liability lower.
For illustrative purposes, let’s assume that Joe and Jane Smith are 58 years old and are employed with a taxable income of $300,000. This places them squarely in the 33% marginal tax bracket. However, in retirement, they anticipate they will only need $140,000 of taxable income to sustain their desired standard of living. This would place them in a 25% bracket. Every year Joe and Jane like to give about $10,000 to their church. A donor advised fund may make a lot of sense for Joe and Jane because, if they know they are going to make the gifts anyway, they can set the money aside now and take advantage of the tax deduction at a 33% marginal rate as opposed to a 25% rate.
As always, be sure to consult with a qualified financial professional before incorporating any of these ideas into your own personal financial plan.
Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.
This material is being provided for information purposes only and is not a complete description of all information necessary for making a decision, nor is it a recommendation to buy or sell any investment. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Consult a tax or legal professional for any specific tax or legal matters. C14-034226