Donor Advised Fund make sense for me?

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truenyer
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Donor Advised Fund make sense for me?

Post by truenyer »

I need some help determining if a DAF makes sense for me.

Currently I make $15-$20k per year in charitable contributions. Most of this comes from a single greatly appreciated stock holding. I also itemize deductions under the new law (SALT: $10k, interest: $14k, rest charitable contributions).

Since I want to continue reducing my large position in this one stock by donating shares every year, I am wondering if a DAF makes sense since then I can donate, say, $100k at once, sell those shares at once with no LTCG, and reinvest in a more diversified portfolio.

However, I don’t want to take the $100k deduction all in one year. $100k makes up less than 30% of our AGI. So theoretically I could take it all in one year, but I want to carry it over and only take about $20k over the next 5 years. Is that possible per IRS rules?

Also, what are your thoughts on using a DAF to diversify a single holding with high LTCG while also having to pay 0.6% fee to the fund administrator? I have no issue doing the paperwork for all of the places we donate to, so that part of a DAF doesn’t matter to me.
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willthrill81
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Re: Donor Advised Fund make sense for me?

Post by willthrill81 »

You can spread out your donations to a charity or a DAF over however many years you wish to do so. As long as you're confident that you'll be itemizing your taxes each year along the way apart from any donations, this is a very plausible strategy.

The charitable contribution limit in 2020 is 50% of your AGI. The 30% limit applies to private foundations and a few others discussed on this IRS page.

Assuming that you're going to donate the appreciated shares anyway, then doing so via the DAF makes good sense. I wouldn't let the .6% annual fee drive the decision one way or the other.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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truenyer
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Re: Donor Advised Fund make sense for me?

Post by truenyer »

willthrill81 wrote: Wed Dec 30, 2020 10:35 pm You can spread out your donations to a charity or a DAF over however many years you wish to do so. As long as you're confident that you'll be itemizing your taxes each year along the way apart from any donations, this is a very plausible strategy.

The charitable contribution limit in 2020 is 50% of your AGI. The 30% limit applies to private foundations and a few others discussed on this IRS page.

Assuming that you're going to donate the appreciated shares anyway, then doing so via the DAF makes good sense. I wouldn't let the .6% annual fee drive the decision one way or the other.
But the deduction is taken when the donation to the DAF is done, right? That’s what I want to spread out, not the donations to charities themselves.

Stock donations (which this will be) is limited to 30% of AGI because it’s LTCG property I thought.
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willthrill81
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Re: Donor Advised Fund make sense for me?

Post by willthrill81 »

pianos101 wrote: Wed Dec 30, 2020 10:40 pm
willthrill81 wrote: Wed Dec 30, 2020 10:35 pm You can spread out your donations to a charity or a DAF over however many years you wish to do so. As long as you're confident that you'll be itemizing your taxes each year along the way apart from any donations, this is a very plausible strategy.

The charitable contribution limit in 2020 is 50% of your AGI. The 30% limit applies to private foundations and a few others discussed on this IRS page.

Assuming that you're going to donate the appreciated shares anyway, then doing so via the DAF makes good sense. I wouldn't let the .6% annual fee drive the decision one way or the other.
But the deduction is taken when the donation to the DAF is done, right? That’s what I want to spread out, not the donations to charities themselves.

Stock donations (which this will be) is limited to 30% of AGI because it’s LTCG property I thought.
Yes, the deduction applies in the year in which the donation is made to the DAF.

I don't believe that stock donations are limited to 30% of AGI and don't see that on the IRS page I linked to above, but I could be missing it, or it could be elsewhere. Others here are more fluent in this topic than me.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Donor Advised Fund make sense for me?

Post by grabiner »

You cannot carry over the deduction to multiple years unless you are over the IRS limit. If you want to deduct $20K per year for five years, you have to contribute $20K per year for five years.

What you probably want to do is to deduct enough each year to get down to the top of the 32% tax bracket; you waste part of the benefit if you contribute so much that you are in the 24% bracket.
pianos101 wrote: Wed Dec 30, 2020 10:06 pm Also, what are your thoughts on using a DAF to diversify a single holding with high LTCG while also having to pay 0.6% fee to the fund administrator? I have no issue doing the paperwork for all of the places we donate to, so that part of a DAF doesn’t matter to me.
I worked out the math: Donor-advised fund versus direct stock donation The 0.6% fee is probably slightly more than the tax you would pay for keeping the funds yourself, unless you are in a high-tax state or are donating a high-dividend fund.

However, if you pay off your mortgage (which may or may not be a good deal), you could use the DAF approach to bunch deductions: contribute to the DAF in 2021, take the standard deduction in 2022-2023, and when the DAF has run low, replenish it in 2024 and itemize again.
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Re: Donor Advised Fund make sense for me?

Post by increment »

willthrill81 wrote: Wed Dec 30, 2020 10:44 pm I don't believe that stock donations are limited to 30% of AGI and don't see that on the IRS page I linked to above, but I could be missing it, or it could be elsewhere. Others here are more fluent in this topic than me.
This 30% limit applies if you want to deduct the (long-term) appreciated value. (The limit is 50% if you are happy to deduct the basis.) See Publication 526 somewhere around the words "Your noncash contributions of capital gain property to 50% limit organizations is limited to 30% of your adjusted gross income".
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Re: Donor Advised Fund make sense for me?

Post by truenyer »

grabiner wrote: Wed Dec 30, 2020 10:45 pm You cannot carry over the deduction to multiple years unless you are over the IRS limit. If you want to deduct $20K per year for five years, you have to contribute $20K per year for five years.

What you probably want to do is to deduct enough each year to get down to the top of the 32% tax bracket; you waste part of the benefit if you contribute so much that you are in the 24% bracket.
pianos101 wrote: Wed Dec 30, 2020 10:06 pm Also, what are your thoughts on using a DAF to diversify a single holding with high LTCG while also having to pay 0.6% fee to the fund administrator? I have no issue doing the paperwork for all of the places we donate to, so that part of a DAF doesn’t matter to me.
I worked out the math: Donor-advised fund versus direct stock donation The 0.6% fee is probably slightly more than the tax you would pay for keeping the funds yourself, unless you are in a high-tax state or are donating a high-dividend fund.

However, if you pay off your mortgage (which may or may not be a good deal), you could use the DAF approach to bunch deductions: contribute to the DAF in 2021, take the standard deduction in 2022-2023, and when the DAF has run low, replenish it in 2024 and itemize again.
Thanks for clearing that up. We are at the very bottom of 32% bracket now. But the “must take all” deduction is what I do t want right now, while we are still itemizing. Obviously when we get into standard deduction territory it’s a different story.
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Re: Donor Advised Fund make sense for me?

Post by truenyer »

increment wrote: Wed Dec 30, 2020 11:20 pm
willthrill81 wrote: Wed Dec 30, 2020 10:44 pm I don't believe that stock donations are limited to 30% of AGI and don't see that on the IRS page I linked to above, but I could be missing it, or it could be elsewhere. Others here are more fluent in this topic than me.
This 30% limit applies if you want to deduct the (long-term) appreciated value. (The limit is 50% if you are happy to deduct the basis.) See Publication 526 somewhere around the words "Your noncash contributions of capital gain property to 50% limit organizations is limited to 30% of your adjusted gross income".
Exactly yes. Why wouldn’t I want to deduct the full appreciated value!
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Re: Donor Advised Fund make sense for me?

Post by willthrill81 »

increment wrote: Wed Dec 30, 2020 11:20 pm
willthrill81 wrote: Wed Dec 30, 2020 10:44 pm I don't believe that stock donations are limited to 30% of AGI and don't see that on the IRS page I linked to above, but I could be missing it, or it could be elsewhere. Others here are more fluent in this topic than me.
This 30% limit applies if you want to deduct the (long-term) appreciated value. (The limit is 50% if you are happy to deduct the basis.) See Publication 526 somewhere around the words "Your noncash contributions of capital gain property to 50% limit organizations is limited to 30% of your adjusted gross income".
I thought that I must have been missing something. Thanks!
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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GerryL
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Re: Donor Advised Fund make sense for me?

Post by GerryL »

pianos101 wrote: Wed Dec 30, 2020 10:06 pm ...

Also, what are your thoughts on using a DAF to diversify a single holding with high LTCG while also having to pay 0.6% fee to the fund administrator? I have no issue doing the paperwork for all of the places we donate to, so that part of a DAF doesn’t matter to me.
OP, Your wording here is a bit confusing: "using a DAF to diversify a single holding." Not clear what you mean by "diversify." Once you put the money in a DAF, it is no longer yours. No longer a part of your portfolio. So by donating to the DAF you are reducing, not diversifying.

I am using my own appreciated stock to fund my DAF, contributing 2 years' worth of donations each even-numbered year. I bundle as much as I can into those years and take the standard deduction for odd-numbered tax years.

Donate as much as you want to get the tax benefits you need in a given year and then recommend grants to your preferred charities at your own pace.
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Re: Donor Advised Fund make sense for me?

Post by shess »

pianos101 wrote: Wed Dec 30, 2020 10:06 pm Since I want to continue reducing my large position in this one stock by donating shares every year, I am wondering if a DAF makes sense since then I can donate, say, $100k at once, sell those shares at once with no LTCG, and reinvest in a more diversified portfolio.

However, I don’t want to take the $100k deduction all in one year. $100k makes up less than 30% of our AGI. So theoretically I could take it all in one year, but I want to carry it over and only take about $20k over the next 5 years. Is that possible per IRS rules?
Note that you can also sell some shares, which will increase your AGI, which will let you donate more shares to a DAF.

Personally, I find using a DAF is much more convenient than dealing with individual share grants. You mention that that paperwork doesn't bother you, so maybe it's not worth it for you. Note that DAFs vary on minimum payments, some as low as $50. At least for myself, my minimum share grant would be higher than I'm interested in giving some some charities :-).

I'm not exactly sure what the concern one poster has about 24% rate is. Sure, you get a juicier deduction if you can maintain all of your charitable giving out of the 32% rate. But you're also paying a cost to have $14k of mortgage interest which effectively isn't deductible just to get any deduction. Life is full of choices. I'd be happy putting $100k into the DAF and refreshing every few years, even if it's not the most tippy-top optimal approach.
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Re: Donor Advised Fund make sense for me?

Post by truenyer »

GerryL wrote: Thu Dec 31, 2020 3:30 am OP, Your wording here is a bit confusing: "using a DAF to diversify a single holding." Not clear what you mean by "diversify." Once you put the money in a DAF, it is no longer yours. No longer a part of your portfolio. So by donating to the DAF you are reducing, not diversifying.
I fundamentally want to reduce my position in this one holding as much as possible. Once the money is in the fund and a more diversified portfolio is chosen, it still appreciates differently than a single stock. And those gains also then can be donated. So in essence, yes it is part of my indirect portfolio, because the gains from the fund are still mine to donate.

I think some people here are confusing my issue. I CAN deduct the full amount in one year, I don’t need to spread it out I was just asking if I can. Seems like I have to take the deduction all at once until, the limit is reached and then I can carryover (which isn’t applicable to my case).
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