There are many reasons why individuals make charitable gifts. Making a philanthropic commitment is usually motivated by a passion for the cause and a desire to help the organization achieve its mission. For many, though, tax planning will also play a significant role in the manner in which a philanthropic gift is selected.
When planning a charitable gift, donors can choose whether to make a present-day gift or a planned gift through a philanthropic vehicle. Gifts made through philanthropic vehicles often provide valuable and current-year tax benefits while deferring the time when a gift will be dedicated to programmatic support.
Both donor-advised funds and private foundations offer a variety of attractive features, including the ability to set aside significant charitable funds now and distribute them later. However, the choice between these two vehicles often comes down to three words: simplicity, flexibility and taxes.
Briefly, donor-advised funds are far simpler to create and administer than private foundations are. Specifically, donor-advised funds impose no annual tax-reporting requirements of their donors, while boards of private foundations must file complex annual-information returns.
Additionally, donor-advised funds can offer greater flexibility in grant making than can private foundations. Foundations, however, do have some advantages. Though less favorable in terms of tax benefits and their administrative burden, private foundations allow the donor greater control over distributions.
At the same time, the tax deductibility of contributions is a defining difference for many people. A gift to a donor-advised fund can generate a larger deduction for a donor than a gift of the same property to a private foundation. This is based upon two rules that limit the amount of charitable deductions that an individual may claim on a federal income tax return.
Under the first rule, the charitable deduction that an individual may claim in any given year is limited to a percentage of his or her adjusted gross income for that year. Federal tax law generally permits higher percentage limitations for gifts to donor-advised funds than for gifts to private foundations. To the extent that a contribution may not be deductible in the current year, deductions for the excess contribution may be carried forward for up to five succeeding years.
The second rule limiting the number of charitable deductions has to do with the value of a non-cash gift: That value, for tax purposes, is often higher for a contribution to a donor-advised fund than one to a private foundation.
Gifts of non-cash property, in fact, usually are valued at either the property’s fair market value on the date of the gift or the property’s tax basis (which is often the amount the donor paid to acquire it). Aside from certain gifts of publicly traded stock, most contributions to private foundations are valued using the basis of the assets. However, donors may value a wide variety of gifts to donor-advised funds using the assets’ fair market value.
High-income taxpayers also may see their contribution deduction affected by the “Pease limitation,” which reduces the itemized deductions a taxpayer may claim based on income above a certain threshold. The limitation for 2017 applies to AGI levels that exceed $313,800 for joint filers and $261,500 for individuals, indexed for inflation. This limitation applies to most itemized deductions, including the charitable.