This Is Donor-Advised Funds Season

Posted by: Brookside Admin

With only a couple of weeks remaining in 2015, many individual tax payers are scrambling to find a way to significantly reduce their tax liability and get a big tax-write off before the end of the year. In many cases, this is because their taxable income for 2015 is higher than usual, or at least higher than expected. This could be because of an inheritance, winning a cash prize, or any other sudden windfall into their bank account. By taking no action, they lose a lot of that extra income to taxes. By making an intelligent contribution to charity, however, they can put the money to good use and get a sizable deduction in the process. For the purposes of this post, we'll be discussing specifically donor-advised funds and how they could be a good option if you're in this situation. 

  • What are donor-advised funds? 

The idea behind these funds is that you can make a sizable donation to them now and get all the usual tax benefits of a charitable donation made before the end of the year. However, since you're in a time crunch and likely don't have time to do your due diligence on finding a worthwhile charity to donate to, donating to a donor-advised fund delays that decision. Instead of having to choose exactly which charity your money goes to, you can deposit it in a fund run by an established 501(c)(3) organization then come back later to decide which charity is most deserving of that money. You can even come back and use that money to start your own charity, assuming you go through the necessary steps in establishing it. 

  • Why use a donor-advised fund?

As mentioned, a donor-advised fund allows you to avoid the time crunch at the end of the year, but still get the big tax write-off you're wanting. This is extremely useful if you received an unexpected lump sum of cash near the end of the year and need to act fast. These funds are also often used by individuals who find themselves in the top tax brackets with hundreds of thousands of dollars in taxable income. This is because of the limitations on other types of donations. For example, there's a cap on how much money you can invest in a retirement plan so if you need to donate $60-thousand dollars or more, you'll likely need an alternative option. Again, this is particularly useful for individuals who aren't often in this position. For them, waiting to make a donation until next year won't help because their taxable income will already be significantly lower. 

  • Are their limits? 

The short answer is yes. As with everything involved with taxes and the IRS, there are no perfect solutions. For those individuals in a high tax bracket that we discussed earlier, they'll face a slight obstacle if their annual gross income is above certain thresholds. Their itemized deductions will be reduced by 3-percent of the excess income. This means that if you suddenly inherit $1-million, any itemized deduction for a donation will be reduced by $30-thousand. In most cases, donor-advised funds, or other charitable donations, are still worth it. If you're trying to significantly reduce an income of more than $1-million, you're likely making donations in the hundreds of thousands of dollars range. That means the $30-thousand you miss out on isn't as big of a deal. 

Coming into a large sum of money can be great, until the IRS shows up for their share. If your taxable income is much higher than usual this year, take steps now so limit the amount lost to taxes. 

For help with tax issues like these, contact the expert CPAs at Brown Kinion and Company.