Check my thinking on Donor Advised Fund for tax deduction

[luckyducky99]

I stopped working this year, and am thinking of opening a Donor Advised Fund in order to get the large charitable tax deduction while it's still worth something to me. 

I'll be in the 37% federal tax bracket this year, filing as single; no state tax.  I expect to have very little taxable income starting next year.  Maybe a pittance in non-qualified dividends. Also I'll be itemizing this year, but probably wouldn't be in future years since I paid off my mortgage this year.

Since I plan to keep giving to charity regularly anyway, it seems like a no brainer to throw a large lump at a DAF.  For every dollar I put in the DAF, I'll save 37% of that on taxes this year (assuming I stay in the same bracket after the deduction -- but you get the point).  So e.g. donating $100k in appreciated mutual funds from a taxable account really only costs $63k.

Two questions from this:
- Is my math about right?  Any considerations I'm missing or anything I have wrong in my thinking? Any reason not to do this?
- Practically, how does this work when you file taxes?  Does the IRS just trust me when I say that I donated like 40% or whatever of my income to charity?  Or are there extra forms you fill out in cases like this?

Thanks!

[mc7]

The reporting part is simple. Yes, there’s an IRS form generated when you donate a large amount from a brokerage or mutual fund account to a donor advised fund.

(Edit: removed some comments on marginal rates that may not be relevant)

[jebmke]

When you file, you will complete a Form 8283 to accompany your Schedule A which lists all your itemized deductions.

Make sure the appreciated securities have long term gains, not short term.

[Duckie]

For every dollar I put in the DAF, I'll save 37% of that on taxes this year (assuming I stay in the same bracket after the deduction -- but you get the point). So e.g. donating $100k in appreciated mutual funds from a taxable account really only costs $63k.

Make sure the mutual fund shares you contribute are long-term.

Is my math about right? Any considerations I'm missing or anything I have wrong in my thinking? Any reason not to do this?

This looks like a good idea to me.

Practically, how does this work when you file taxes? Does the IRS just trust me when I say that I donated like 40% or whatever of my income to charity?

You will get a letter from the DAF reporting how much you contributed. Save that in case the IRS comes calling.

You are allowed to take a deduction of up to 50% 30% of Adjusted Gross Income. If you give more the excess may be carried forward for five years.

Or are there extra forms you fill out in cases like this?

You will need to add Form 8283 because the mutual fund shares are non-cash charitable contributions.

[increment]

You will get a letter from the DAF reporting how much you contributed. Save that in case the IRS comes calling.

You are allowed to take a deduction of up to 50% of Adjusted Gross Income. If you give more the excess may be carried forward for five years.

Or are there extra forms you fill out in cases like this?

You will need to add Form 8283 because the mutual fund shares are non-cash charitable contributions.

I believe that the limit for non-cash assets (with long-term capital gains) is 30%, not 50%. (There are various adjustments this year from the CARES Act, but I don't think that this was affected, at least not in the case of DAFs.)

[Mike Scott]

I would run some early tax forms to make sure you are getting what you want to happen and that you understand the maximum benefit.

[Duckie]

I believe that the limit for non-cash assets (with long-term capital gains) is 30%, not 50%.

Oops, you're correct. Fixed.

[luckyducky99]

Thanks to all for the feedback.

I believe that the limit for non-cash assets (with long-term capital gains) is 30%, not 50%.

Thanks. This is the kind of thing I wasn't aware of.

I would run some early tax forms to make sure you are getting what you want to happen and that you understand the maximum benefit.

This is a good idea, and while I'd like to be lazy and not bother, you're probably right.

[Stinky]

I agree that this is a no brainer. You can save taxes at your 37% marginal rate this year to the limits mentioned in posts above.

A point not mentioned above that you probably already realize -.
—- Since you’re donating appreciated mutual funds, you’ll also be avoiding paying taxes on the unrealized gain.

[Ninjadoc]

Make sure the appreciated securities have long term gains, not short term.

Why does it have to be long term gains?

[MathIsMyWayr]

Make sure the appreciated securities have long term gains, not short term.

Why does it have to be long term gains?

Short term gains are not deductible. You may deduct the fair market value less the short term gain.

[tj]

Make sure the appreciated securities have long term gains, not short term.

Why does it have to be long term gains?

Short term gains are not deductible. You may deduct the fair market value less the short term gain.

When I funded my DAF, I just sold the short term gains to cash first. I did not have any long term gains at the time.

[bluquark]

- Practically, how does this work when you file taxes?  Does the IRS just trust me when I say that I donated like 40% or whatever of my income to charity?  Or are there extra forms you fill out in cases like this?

You write in what you donated on form 8283, and like most of the US tax system you assert an amount and the IRS might trust you or they might audit you. Your DAF will send you a tax substantiation letter reporting the amount donated, but you don't have to attach it to your return.

The IRS rules give you a bit of wiggle room to deduct the valuation of the security on either the day you placed the order to donate it or the day the charity/DAF receives it, so taking a screenshot of your brokerage account on the day you make the donation and reporting that amount is probably also good enough. I usually end up claiming what's on the DAF letter to keep my records straightforward, but I recommend taking such a screenshot anyway to have a record of your cost basis and purchase date, which -- unlike when you sell a security -- isn't required to be provided in any tax form from your DAF or brokerage.

[TheGreyingDuke]

Make sure the appreciated securities have long term gains, not short term.

Why does it have to be long term gains?

Short term gains are not deductible. You may deduct the fair market value less the short term gain.

When I funded my DAF, I just sold the short term gains to cash first. I did not have any long term gains at the time.

I don't think you made a contribution that sheltered you from the short-term gains, you will owe them when you file (or owed them when you filed in the year of the transaction).

[Gill]

Make sure the appreciated securities have long term gains, not short term.

Why does it have to be long term gains?

Short term gains are not deductible. You may deduct the fair market value less the short term gain.

In other words, with short term holdings you may only deduct the basis.
Gill

[tj]

Make sure the appreciated securities have long term gains, not short term.

Why does it have to be long term gains?

Short term gains are not deductible. You may deduct the fair market value less the short term gain.

When I funded my DAF, I just sold the short term gains to cash first. I did not have any long term gains at the time.

I don't think you made a contribution that sheltered you from the short-term gains, you will owe them when you file (or owed them when you filed in the year of the transaction).

I wasn't trying to shelter short term gains. There is no purpose in donating a short term gain because you have the lower agi limitation than donating cash. You're better off paying tax on the gain, assuming you don't already have cash you want to donate and keep the investment holding.