New SECURE 2.0 Donor Advised Funds Updates for 2023

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If you’re in search of a way to reduce your 2023 tax bill and give back to the community, donor advised funds may be worth considering. Also known as a DAF, a donor advised fund is a charitable investment strategy you can use to support charities that are important to you, while receiving tax-advantages. You may contribute cash, stocks, bonds, mutual fund shares, private company stock, cryptocurrencies, and other types of assets through a DAF.

New SECURE 2.0 law tax benefits for 2023

You may claim a tax deduction the year you contribute to the DAF, rather than the year your contribution actually goes to the charity. Note that this is new legislation for 2023; previously donors didn’t receive the tax deduction until the charity received the DAF assets.

Using the DAF five-year carrying forward strategy, you can prepay five years’ worth of donations, taking the combined contributions as a tax deduction this year. Here’s an example of how the five-year carry forward strategy works:

Let’s say you donate $1500 per month or $18,000 per year to a charity. If you’d like and are able to, you can prepay five years’ worth of donations by contributing $90,000 in a DAF today. While the DAF would use the funds to distribute $1500 per month to a charity, you’d enjoy a $90,000 tax deduction this year instead of $18,000 per year for the next five years.

When the charity receives the gift, they are responsible for taxes, if applicable, depending on their tax status.

Selecting a non-profit beneficiary

You don’t have to select a nonprofit beneficiary (charity) immediately when making a contribution to a DAF. Instead, you can wait to decide which IRS-eligible nonprofits you want to donate to. Waiting to designate a non-profit provides more time for the DAF’s investment strategies to accumulate in value. Here are other things to note about DAFs:

  • There are no contribution limits on how much a donor may contribute to a DAF.
  • All contributions to the DAF are irrevocable and cannot be taken back once they are gifted.
  • All donated assets belong to the sponsoring organization, with the donor maintaining advisory and grant-making privileges.
  • All grant recommendations from DAFs must be approved by the sponsoring organization.

DAFs as a tax-savings strategy

Capital gains taxes are imposed when you make a profit from selling an asset. Fortunately, you won’t be responsible for capital gains taxes on assets you contribute to a DAF as long as you don’t liquidate the assets first and then donate them to the DAF. Here’s other things to know about DAFs and taxes:

  • Publicly-traded securities or illiquid gifts that have been held for more than one year must be donated at fair market value directly to the DAF.
  • Donors can receive an immediate income tax deduction for cash, check, or wire transfer of up to 60 % of adjusted gross income (AGI).
  • The deduction for securities and other appreciated assets (i.e. closely held stock, real estate, illiquid assets) is up to 30 % of AGI.

Leave a legacy through giving

When you design your estate plan, you can request that any remaining assets in your DAF be donated to the charities of your choice after you pass away. Another option is to pass the assets to your heirs so they can continue your philanthropic efforts and give to the charities they support.

Thinking about your legacy?

© 2024 Trajan® Wealth LLC. Nothing in this blog is intended as investment advice, nor is it an offer to buy or sell any security. Please consult your financial advisor for questions about your personal financial situation. All investments involve risk, including the potential for loss. Trajan Wealth clients and employees may have a position in any of the securities mentioned. Portfolio holdings and other data are subject to change at any time and without notice. Additionally, the above links provided as a convenience and for informational purposes only; they do not constitute an endorsement or an approval by Trajan Wealth, L.L.C., of any of the products, services or opinions of the corporation or organization or individual. Trajan Wealth, L.L.C., bears no responsibility for the accuracy, legality or content of the external site or for that of subsequent links. These materials are for informational and educational purposes and are not designed, nor intended, to apply to any person’s individual circumstances. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Please consult with your legal and/or tax advisor before making any tax-related decisions.

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