This year, we’re spending our time either congratulating our clients for sticking it out when the market goes up or reminding our clients to keep a long-term perspective when the market goes down. And, in between all of the hand holding, we’re dealing changing tax laws! So, why would I suggest that this might be the time to consider donor advised funds?
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Our clients are potentially facing higher taxable income this year because of Roth IRA conversions. Even if we’re harvesting tax losses, only $3,000 can be used to offset conversion income. Coming up with additional deductions might be helpful, but might also lead to Alternative Minimum Tax. How can we help our clients lower their tax bills? A donor advised fund (DAF) may be the answer.
A DAF works like a “charitable IRA.” The donor contributes cash or appreciated securities to the fund and receives an immediate charitable deduction equal to the fair market value of the contribution. The fund can invest the proceeds, which can earn income on a tax-free basis. The donor can then recommend grants from the fund to pay out to qualified charitable organizations. The benefits of a DAF are many:
• Immediate tax deduction upon contribution to the DAF
• Tax-free earnings within the DAF
• A pool from which the donor can make contributions currently or in the future
Establishing and making significant DAF contributions this year can offset Roth conversion income. And, better yet, charitable contributions are not subject to Alternative Minimum Tax! If you have a client that normally makes charitable donations and is in a high tax bracket this year (because of Roth conversion income), recommending a DAF could make you a hero! You might even be a super-hero if your client has appreciated securities to donate!