If you're interested in giving substantial amounts of money to a charity, whether for a tax deduction now or because of detached generosity you might want to know about donor advised funds. A donor advised fund is an investment account into which a charitable donors can put money now, and get a federal income tax deduction now, but direct the distributions to charities of the donor's choice in future years. Many organizations sponsor these funds because they make charitable giving easier and more flexible for those who donate.
Interested in putting your money in a donor advised fund? Looking for a little more information on such funds? Look no further. This article is designed to help you understand the many facets of donor advised funds.
How Does a Donor Advised Fund Work?
Typically opened by investment companies or traditional mutual fund sponsors or brokers, donor advised funds are generally beneficial to both those who manage them, and those who give to them. Fund managers can receive good returns on assets donated and will receive commissions and fees for their advice. At the same time, donors can receive current tax deductions for the value of assets donated. All donations are tax deductible up to 50% of the donor's gross adjusted income, which may generate substantial tax refunds to the donor, depending on the facts and other deductions on the return of the year in question. Placing money in a donor advised fund typically requires a one-time fee, but once the money is in the fund, it can remain there indefinitely. The fund will then grow as it accrues interest, maximizing the final amount that will be passed along to the charity.
Important Things to Know About Donor Advised Funds
Donor advised funds are fairly complex. Because of this, people often have misconceptions about them. To help you avoid these misconceptions, there are some important things you should know. They are as follows:
Only Your Initial Donation is Tax Deductible
It's important to note that only your initial donation to a donor advised fund is tax deductible. If the donation grows while in the fund, you are not allowed to deduct its growth.
Therefore, if you initially donate $5,000, and the fund grows to $8,000 over time, you are only allowed to deduct $5,000. You can, however, deduct as many initial donations as you would like. For instance, if you put in $5,000 at one time, then $3,000 at another time, you can deduct $8,000 in total from your taxes.
Your Charity of Choice May Not Be Permitted by Your Fund
While most donor advised funds allow you to give to all big charities, many donor advised funds don't cover smaller charities. If a fund does not permit distributions to a smaller charity, you will not be able to give to that charity through the fund.
It is possible, however, to get your fund manager to approve of a smaller charity after you've already put money in the fund. However, this is not a typical practice.
Funds Given are Irrevocable
When giving to a donor advised fund, there is something which you absolutely should know. You should know that all funds given are not able to be taken back; the transfer is irrevocable. All transactions between you and a donor advised fund are final.
Because of this, you should plan your financial budget diligently. You likely don't want to give away money that you might later need to pay necessary expenses.Similarly, you don't want to make a large charitable gift in a year where you cannot use the deduction.
You Can't Receive Anything in Exchange for Your Donation
One last thing to consider is that your donation must be an altruistic donation. This means that you must give money without getting anything in return. If you give money to a charity, but are given a gift in return, your donation is no longer considered tax deductible.
Utilize the Help of a Des Plaines Area Tax Attorney
Need help opening or giving to a donor advised fund? Looking for a Des Plaines area tax attorney? If so, the experts at John J. Pembroke & Associates can help.
Contact us today to schedule an appointment!