4 Ways That a Donor Advised Fund Could Have Helped Lower TaxSubmitted by American Endowment Foundation on March 12th, 2015
By Eric Kinaitis
As the April 15 deadline gets ever closer, more and more taxpayers realize there were steps they should have taken in 2015 that could have lessened the tax bill that they will owe in 2016.
At this time of year, depending upon their unique circumstances, many taxpayers wonder:
- “Did I get as many deductions on my income tax as I could have?”
- “Did I do enough to lessen taxes on my capital gains?"
- “Although I received an inheritance, did I do enough to protect myself from estate taxes?”
- “Ouch, I am going to get hit with alternative minimum tax! What could I have done differently?"
How Could a Donor Advised Fund (DAF) Have Reduced Taxes in 2014?
Due to their structure, donor advised funds provide specific tax reduction opportunities in the following ways:
1.) Income Tax Deduction: The donor receives an immediate tax deduction in the year they contribute to their DAF. Since a DAF administrator is a public charity, contributions made to donor advised funds immediately qualify for maximum income tax benefits. The IRS does mandate annual limitations, depending upon the donors adjusted gross income (AGI):
- Deduction for cash – up to 50 % of AGI.
- Deduction for securities and other appreciated assets – up to 30 % of AGI.
- There is a five-year carry-forward for unused deductions.
2.) Capital Gains Tax Avoidance: The donor will incur no capital gains tax on gifts of appreciated assets (i.e. securities, real estate, other illiquid assets.)
3.) Estate Tax Avoidance: The DAF will not be subject to estate taxes.
4.) Alternative Minimum Tax (AMT) Reduction: If the donor’s income is subject to alternative minimum tax (AMT), the contribution to their donor advised fund will reduce their AMT impact.
Other Tax Considerations
In contrast to gifts made to a private foundation, taxpayers can deduct the full market value of certain contributed assets, subject to the AGI limitations listed above. These assets include:
- Closely held stock (C-corp or S-corp)
- Real estate
Plan now in 2016 to avoid the season of tax regrets in 2017. Contact us at 1-888-660-4508 to discuss the specifics of your client and how a donor advised fund through American Endowment Foundation can aid their tax planning.
Note: The information provided herein is for informational purposes only and should not be interpreted to constitute legal and/or tax advice. Donors should consult their legal and tax advisors regarding their specific situations.