Late in 2016, Karissa and I decided that we need to make some charitable contributions. While Karissa is a giver by nature, I’m a bit of a scrooge. I always felt that I could use that next dollar more than a charity – I had goals to leave my job, after all! We tended to give a few hundred dollars a year to various organizations.
The last few years, we’ve owed Uncle Sam quite a bit at tax time. Mostly because Karissa didn’t elect to have enough taxes withheld from her paychecks. The first year was a major shock. The second year was expected, and this year I think we may avoid paying any more to the government.
Because our income will shrink drastically in 2017 vs. 2016, we had a major incentive to do any and all large-scale charitable giving in 2016 rather than 2017. And because we tend to put things like this off, we waited until December to really consider how and where to give.
Out of the blue, an article on Frugalwoods gave us the answer! We would create a Donor Advised Fund. This way, we’d get the tax benefits of charitable giving in 2016 without the need to disburse the funds in any given year. The funds can be invested until they’re given out to the organization(s) of our choice. While we don’t get tax benefits in the year of giving, we don’t care. Plus, we can give somewhat freely because the money has already been set aside.
We plan to give about 5% of our fund away each year. This is comparable to how most large endowments make grants. The theory is that investment returns will grow/maintain the fund in real terms, allowing giving to keep pace with inflation.
We chose to open our Donor Advised Fund at Schwab. The minimum to create the account is $5,000 with $500 minimum additions thereafter. The minimum disbursement is $50. The entire interface is online, though Schwab is just a phone call away. Fees are 0.6% or $100, whichever is greater.
The other cool thing about Donor Advised Funds is that you can contribute shares of stock. We chose to contribute some old shares that had large capital gains we’d been planning to sell. By contributing shares rather than cash, we avoid the capital gains tax and can deduct the full value of the contribution.
We contributed $20,000 of shares that had doubled since we bought them and another $5,000 of cash. So our net, post-tax contribution was just $13,000!
| Cash Value | $5,000 |
| Share Value | $20,000 |
| Avoided Capital Gains Tax ($10,000 x 20%) | $2,000 |
| Avoided Income Tax ($25,000 x 40%) | $10,000 |
| Net, Post-Tax Equivalent | $13,000 |
For $13,000, we get to give away $25,000! We’ll pay $12,000 less in taxes in 2016 than had we not created the account, and feel like Big Time Charitable Folks (Bill & Melinda Gates, Warren Buffet, etc) when the organizations get a check that says “The RoseRelish Charitable Fund” or something similar.
For folks looking to retire early, nearing retirement, or with income tax situations that change over time, a Donor Advised Fund could be great for you too.