Consider Using a Donor Advised Fund
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If you regularly give to charity and have income that fluctuates, I’m going to show you something that is going to save you money. As I’m sure you know, your charitable contributions are deductible from your income for tax purposes.
So, if you give $10,000 per year, you get to reduce your taxable income by $10,000 each year. However, it’s possible that your income may not be as predictable. If you sometimes have years with much higher income than others, I’m going to show you how to save money on taxes by using a donor advised fund.
How Does it Work?
If you fund the next several years’ worth of charitable giving all in one tax year, you can take the entire deduction in this same year. And if you do this in a year that your income is abnormally high, you are getting the tax benefit at a higher tax rate, which will save you more money than simply taking the annual deduction each year.
In other words, if you get a windfall, perhaps through selling your appreciated Company Stock, you can offset some of the tax by committing to give the money today that you were planning on giving in the future. You do this by creating a donor advised fund with one of the reputable administrators and funding it in the same tax year as your spike in income.
The money can then be invested in the manner you wish. Whenever you are ready to send it to the charity of your choice, you simply direct the administrator and manager to do so.
You get the entire tax deduction today to use against the extra income you are receiving today. And you don’t even have to define who you will ultimately give the money to. Isn’t that great?
Things to Consider Beforehand
Just like any charitable strategy, this only makes sense if you were planning on giving away this money in the future. No tax deduction actually makes you money all by itself. You have to want to give the money to charity.
Also, you cannot get the money back. You actually transfer ownership from you to the donor advised fund which is run by the administrator. They simply agree to take direction from you on how to invest the money and where to send it so long as it goes to a qualified charity.
Here’s an Example
Let’s say you’ve decided to trade out of your company’s stock and are realizing gains of $400,000 this year. Also, let’s say you normally give $10,000 to charitable causes on an annual basis.
You can place $100,000 – that’s ten years of charitable gifts – into a donor advised fund today and take a $100,000 deduction to your overall income today. You will still have control of that money in terms of how it will be invested and where it will be gifted in the future.
For people who are charitably inclined who also have volatile incomes, a donor advised fund can be a great way to offset taxes at the higher rates in those higher income years.