Every Thanksgiving at my house, we go around the table and each say what we are thankful for. During the annual tradition this past Thanksgiving, I was reminded once again how blessed my family is and how important it is to give to charity.
This year, however, there’s a new wrinkle to the time-honored holiday season tradition of giving to charity – and of qualifying for an income tax deduction for charitable contributions.
With the US government facing a budget crisis and looking for ways to trim spending and boost revenue, speculation has abounded lately that the charitable tax deduction could eventually be limited significantly. In fact, a number of proposals for changing the deduction – including one from President Obama – have emerged in recent months.
If you’re worried that time is running out for the deduction in its current form, you might want to consider using a donor-advised fund to make your charitable donations this year.
A donor-advised fund is an increasingly popular charity vehicle as it essentially allows you to receive immediate tax deductions for your future charitable donations. When you make an irrevocable contribution into a donor-advised fund, you can take a deduction now and delay having to decide where to donate the money. While you are deciding where to donate the money, it remains in the fund, maintained by an overarching charity. It can be invested among various investment options and grow tax free.
To understand the tax benefits of such funds, let’s take a quick look at one example of a donor-advised fund, the iShares Charitable Giving Program. It is offered in partnership with National Philanthropic Trust (NPT), the independent public charity overseeing the fund.
The minimum required contribution to take part in the iShares program is $25,000.1 If you contribute at least that amount to the fund by the end of the year, you can deduct your contribution from your 2011 taxable income, with deductibility limited to up to 50% of your adjusted gross income.2 Contributions in excess of that 50% limit can then be carried forward and applied against your taxable income for up to five years.
You can also give a wide range of assets beyond cash to the fund and the full market value of donations of appreciated securities may also be deducted, with deductibility limited to up to 30% of your adjusted gross income.
While you can get the tax benefits now (and potentially for the next five years) when you contribute to a donor-advised fund, you don’t have to immediately specify where your money should be donated. Instead, you just need to make a minimum donation of $250 from the fund every three years. Finally, while the money is sitting in the fund, it can be invested among 25 iShares ETFs and can potentially grow tax free.
To be sure, donor-advised funds aren’t without fees. The iShares offering, for instance, charges an annual administrative fee that depends on the asset value in the account, with fees ranging from 0.60% to 0.10% of assets.
Donor-advised funds also aren’t immune from potential future changes. An opinion piece in The New York Times, for instance, recently called for Congress to enact rules requiring that money in donor-advised funds go to charities within seven years of contribution.
Currently, though, donor-advised funds allow you to receive a tax deduction now for planning ahead for your charitable contributions.
1. Contributions to the fund are irrevocable and unconditional when received and accepted by NPT, and NPT retains exclusive legal control over contributed assets. All subsequent contributions after the initial contribution must be a minimum of $5,000.
2. The iShares CGP is offered in partnership with National Philanthropic Trust (NPT), an independent public charity. The iShares CGP is subject to the terms and conditions of NPT’s articles of incorporation and bylaws. NPT’s Board of Trustees and BlackRock, Inc., reserve the right to modify the iShares CGP at any time.
As per IRS regulations, contributions to NPT are irrevocable, and NPT retains exclusive legal control over contributed assets. NPT has final approval over all donor grant recommendations.
BlackRock, Inc. is not affiliated are affiliated with NPT.
The information and examples provided are not intended to be a complete analysis of every material fact respecting tax strategy and are presented for educational and illustrative purposes only. Tax consequences will vary by individual taxpayer and individuals must carefully evaluate their tax position before engaging in any tax strategy.