Some Great News and Tax Planning

by Phillip J. Hanson, MPA, CAP®, President & CEO
Truman Heartland Community Foundation

     As we enter into a third year of battling Covid, somedays its hard to not be discouraged. The spread of the omicron variant seems out of control as our hospitals continue to be stressed and our schools are struggling to stay open. We all want to be done with the pandemic, but it just keeps on hanging on. We are all longing for some positive news that will give us hope.
     So, let me share some awesome news about charitable giving in our community. I am pleased to share that the total grants and scholarships from your community foundation in 2021 going to various charities and students reached an all-time high of $5.9 Million. That’s an increase of 9% compared to 2020. We know this will continue to increase this year since we added 64 new charitable funds last year that will be making an impact in 2021.
     Many of the new charitable funds are Donor Advised Funds (DAFS). In 2021 the grants from these funds totaled $2.8 Million, nearly half or our total grants. And this total is up 47% compared to 2020. We now have approximately 300 Donor Advised Funds and look forward to another record year of support for charitable organizations.
     You don’t have to be wealthy to set up a DAF you simply need to be charitable, and we have many charitable people in our community. So, if you are one of the many charitable people in our community who are generously supporting their favorite charities and find as you prepare your tax return you still cannot itemize your deductions, now is a good time to do some tax planning for 2022. Charitable Bunching utilizing a Donor Advised Fund is a tax planning tool that is growing in popularity. Like a charitable savings account, a Donor Advised Fund is just like having your own private foundation – only better and much simpler. In addition to enabling you to become more organized and strategic with your charitable giving, a Donor Advised Fund coupled with a "bunching" strategy provides a way for you to maximize your tax benefits.
     Gifts to a Donor Advised Fund are immediately tax-deductible. With a "bunching" strategy, you can use your Donor Advised Fund to contribute multiple years' worth of donations in one calendar year, allowing you to itemize in that year. You then can maintain your regular support of your favorite charities through grants from your Donor Advised Fund over several years. You claim the standard deduction in the years you don't bunch your charitable gifts.
     Let's look at the example of a couple with state and local tax deductions, plus mortgage interest deductions that total $18,000 per year ($10,000 SALT, $8,000 Mortgage). They are charitably minded and currently generously donate $7,000 to support their church and favorite charities, which gives them $25,000 total in itemized deductions. However, since the standard deduction is now $25,900, they cannot itemize. If they use a Donor Advised Fund to bunch their charitable giving and put three years' worth of contributions (or $21,000) into their fund, then they could itemize ($39,000 in deductions this year) and that provides an additional tax savings of $13,900. In the next two years, they would take the standard deduction on their tax return. They would continue to donate their typical $7,000 each year to their favorite charities through grants from their Donor Advised Fund. The Donor Advised Fund resources are invested and will have the opportunity to grow tax-free, resulting in more money available to support both their church and favorite charities.
     Additionally, a Donor Advised Fund offers an opportunity to maximize the power of your charitable contributions with gifts of non-cash assets. By donating appreciated securities, such as stocks and mutual funds, directly to your fund (instead of selling the security and donating the cash), you can gain considerable tax advantages. You avoid the capital gains taxes and receive the charitable deduction for your gift's fair market value. You pay less in taxes and end up with more money to give to your favorite charities.  
     Talk to your financial advisor and do some tax planning now to ensure you have the most effective charitable giving plan to minimize your 2022 taxes and maximize your giving. Waiting until later in the year may keep you from taking full advantage of this tax-saving tool. So, while we may have to wait impatiently for Covid to subside and spring to arrive, now is a great time for your 2022 tax planning.