Now that charitable deductions are being reduced for upper-income taxpayers by the new American Taxpayer Relief Act (ATRA), you may be pickier about giving to charity. There’s a way you can make your donations count while keeping the maximum tax benefits allowed under law.
Strategy: Set up a donor-advised fund. As the name implies, you—as the donor—do more than just put up the cash. You’re also able to dole out the money as you see fit.
According to the National Philanthropic Trust, donor advised funds are the fastest-growing charitable vehicle in the United States with an estimated $43 billion in assets at the end of 2012.
Here’s the whole story: With a donor-advised fund, you generally donate a lump sum to a branch of a financial institution, which manages the fund. In return, you can claim a current charitable deduction. Then you designate those charities you deem to be worthy of your generosity. Although the fund legally controls the money, you essentially decide who gets what, when, where and how.
Typically, the fund will require an up-front gift of at least $5,000, although the minimum may be as high as $25,000. It will also charge a fee—typically equal to 0.5% to 1% of the assets—to pay for administration and investment.
All the usual rules for charitable donations still apply. For instance, if you donate property that you’ve held longer than one year, you can generally deduct the fair market value of the property, rather than its initial cost.
Fly in the ointment: ATRA has reinstated the “Pease rule,” beginning in 2013. Under the Pease rule (named for the Congressman who initially championed it), the most common itemized deductions—including deductions for charitable donations (as well as mortgage interest, and state and local income and property taxes)—are reduced by 3% of the taxpayer’s excess adjusted gross income (AGI) over the applicable threshold of $250,000 for single filers or $300,000 for joint filers. However, affected deductions cannot be reduced by more than 80% under this rule.
Suppose you’re a joint filer with an AGI of $400,000 in 2013. If you’re entitled to a charitable deduction and other affected itemized deductions that total $50,000 this year, your deductions will be reduced to $47,000 [$50,000 – (3% of $100,000)]. That’s a factor to consider for all charitable gifts.
Also, be aware that you’re not allowed to benefit from your own donations in any way. For example, you can’t authorize a fund to pay for tickets to a charity’s fundraising event. Nor can the money be used to contribute to a political party or candidate. There are hundreds of sponsors of donor-advised funds across the country. The list includes financial giants such as Fidelity, Charles Schwab and Vanguard, as well as organizations that specialize in this area, like the National Philanthropic Trust.
Tip: Before you choose a sponsor, review its policies regarding grant recommendations, minimum contributions, investment options, donor services and fees.
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