One year-end strategy we utilize frequently is the use of a donor advised fund.
A donor advised fund is essentially an investment fund in which a client contributes money, at which point the client is able to take a charitable deduction for the monies contributed to the fund. The monies sit in the fund until the donor decides to have the monies distributed to various charities.
These distributions can take place in a current or future year. This is the benefit of using the fund – it allows you to take a tax deduction now but actually give to charities in a future year.
Essentially, a client can accelerate deductions they would make in a future year by donating it all to the fund, then distributing it to charities in a future year. When the monies are distributed from the fund to the charity, there is no tax deduction because the tax deduction was taken upon the monies being contributed to the fund.
This strategy can be extremely valuable in a year when income is expected to be higher than usual, such as the year in which a business is sold or stock options are exercised.
Setting up the account and administering it are generally pretty easy. Once the account is set up, the donor has the option to spread out donations over the year, donate as opportunities arise or set automatic grant recommendations, such as monthly tithing in church or supporting an annual fundraiser. This allows the donor to continue to donate to the same organizations at the same times they have in the past, but consolidates all charitable giving to one statement and eliminates keeping track of multiple receipts throughout the year.
Assets other than cash, such as appreciated stock or even business interests, may be contributed to the fund. There are a variety of investment options and, depending on the approach chosen by the donor, the donation has potential to grow tax-free while it is in the fund. The earnings would then be additional monies that are eligible to be distributed.
If you are interested in learning more about this strategy and how it could impact your taxes, please give us a call and we would be glad to help!
Chad Wouters, CPA joined Earney & Company in December 2006 and became the tax partner in November 2013. With an emphasis on strategy and planning, Chad works with his clients all year to ensure the most efficient tax strategies are put into place. Earney & Company, L.L.P. is a CPA firm that handles tax compliance, consulting and planning as well as audit and other assurance services. For more information please visit www.earneynet.com or call (910) 256-9995. Chad can also be reached at [email protected].
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