Give Until It Hurts (The Taxman)

A while ago, I read How to Give like a Billionaire and the idea got stuck in my head. We finally looked into it and decided to pull the trigger by creating a fund with Vanguard Charitable. The timing was perfect to take full advantage of the charitable donation tax deduction for 2015, without having to rush ourselves in deciding what charities we’d like to support.

Vanguard Charitable is a donor advised fund: You contribute money (irrevocably) that you want to use for charitable giving; the money is held and invested by the fund tax free; you then request grants (donations) be made from the fund to charities of your choice at any point in the future.

This might sound roundabout compared to directly giving to a charity, but there are advantages to this approach, particularly related to managing the tax benefits of charitable donation:

Tax deduction now, allocate donations later: If you want a deduction in the current tax year, it may be tempting to make a rush donation in December (charitable donations skyrocket on New Year’s Eve). Perhaps you’ll end up making no donation at all because you can’t decide what charity you want to support in such a short amount of time.

Contributing to a donor advised fund avoids this problem: the timing of your donation is decoupled from when funds are sent to charity. You can make a donation immediately and claim the tax deduction for the current year, then take your time researching how you would like to allocate the charitable funds.

Consolidate tax deduction in a single high-income year: If your income is higher now than it will be in the future (approaching early retirement for example), a tax deduction is worth more this year then it will be in the future. A donor advised fund lets you shift giving that you plan to do in the future to the current year for tax purposes.

Perhaps you plan to give regularly to charity every year. If you are donating small amounts and have no other deductions, it may not make sense to itemize your deductions and you end up with no tax benefit for the donation; by making a large one time contribution, you can ensure that the tax benefit is larger than the standard deduction.

If you were really clever (and generous) you could imagine using the ability to consolidate your tax deductions to fully optimize the tax situation (within the legal limits): for example if you donated enough in one year to pull your taxable income into a lower tax bracket.

Easily donate appreciated securities: You shouldn’t give cash to charities, instead donate appreciated securities. You get a double tax benefit of avoiding capital gains taxes on the appreciated security and getting a tax deduction for the market value of the donation. Even if you weren’t planning on selling securities to fund your donation, you can take advantage of this as an opportunity to increase your tax basis for free, a form of charitable tax-gain harvesting.

So if you want to donate to charity, and you have any appreciated securities at all in taxable accounts, it makes sense to donate those securities instead of cash. Except not every charity is set up to receive appreciated securities. If you want to donate money to your local school for example, you can’t just walk in there and try to get the principal to accept your mutual funds (well maybe you all live in fancy school districts, I don’t know). Even for charities that accept appreciated securities, it can be a tedious and time consuming process involving printing, signing, and mailing forms (what is this, the 1990s?).

Vanguard Charitable, or any competent donor advised fund, on the other hand is an expert at turning appreciated securities into cash easily: if the securities you want to donate are already held by Vanguard, it can all be done the same day with the click of a mouse. Funds can then be sent to any charity in the form of a check, and the charity doesn’t have to worry about handling the appreciated securities themselves. I don’t think we’ll ever donate cash again, it’s all donating appreciated securities from here on out.

Name your fund: This is probably not as important to you more mature people, but this was a fun exercise in vanity. The Freedom35 Charitable Fund has a nice ring to it don’t you think? Ok we didn’t actually name it that, but it was tempting.

 

We already invest with Vanguard, so their charitable fund was a good option for us to choose. It was easy and quick to donate funds, so we easily met the year end deadlines. Vanguard’s minimum donation requirements aligned with what we were comfortable giving. If you hold your funds elsewhere, or would like to donate less than Vanguard requires to set up an account, review this overview and comparison of other options for donor advised giving. Some of the required minimums are quite low.

For a great overview of the strategies you might use when donating to a donor advised fund, see this article.

Our main motivations are that we do want to donate to charity, and think about donating more in the future. It’s easy to say we’ll donate more in the future, but this forces our hand to do it now. Our tax situation is such that for any charitable donation we make in our high income years, over 40% will be returned in tax benefit. It makes sense to donate what we can now. It’s nice when tax optimization lines up with what we intend to do.

The DIY grooming makes them look like charity cases, but there is no tax deduction for that!

 

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8 Responses

  1. Leigh says:

    Cool! I learned about these last year and I plan to use one some day. My donations budget isn’t quite enough to warrant doing this yet though it would be pretty close if my boyfriend and I did this jointly. It seems like it would really make things simpler at tax time though! It’s so tempting to use Vanguard Charitable considering that we both have all of our investments at Vanguard, but Fidelity has lower minimums ($5,000 initial contribution vs $25,000 at Vanguard and $50 minimum donation vs $500 at Vanguard), so we’ll see what we end up doing eventually.

    P.S. Cute dogs!

    • The MC says:

      Fidelity Charitable is tempting for the lower minimums. Since we made our donation in terms of appreciated securites, and it was already December, it was easiest and quickest to go with Vanguard Charitable. If you hold appreciated securities in Vanguard and want to donate them to a non-Vanguard affiliated donor advised fund, I think you should give yourself at least a month of wiggle room in case it’s slow. You might not be as last minute as us, but we also liked the higher minimum at Vanguard because it forces our hand to be more charitable.

      P.S. the dogs say thanks

  2. I’ve never heard of this before! But sounds like it’s worth checking out. We are definitely in that contingent of people who do the charitable scramble in late December every year (though we also give monthly to some organizations that we especially love), and it would be nice not to worry about it (or to get the fraud alert that inevitably comes when we do a whole bunch of charitable transactions all at once). Thanks for the info!

    • The MC says:

      I think the other nice thing is that it lets you consolidate all your charitable tax receipts into one. One less thing to worry about at tax time!

  3. Supreet says:

    Great article. I followed a link via the MMM forums. After my stash is generated, I hope to join the give 50% pledge (of one’s income) while I work part time during my ER as I enjoy my work. I do wonder what the limits are in terms of favorable tax deductions, although unlikely it would alter by donation strategy. The Boglehead link was was very helpful as well, but I could not make it through the tax document they referenced to find the percentage of AGI. With Zuckerbergs recent strategic charitable donation in the news, I find there are certainly “better” ways to give.

    • The MC says:

      In most cases I think the limit to what you can deduct in one year for charitable contributions is 50% of your adjusted gross income if you are donating cash, or 30% of your AGI if you are donating appreciated securities. If your income is over a certain amount, other limits apply. If you donate more than the limit (good for you), you can carry forward the deduction to future years.
      Either way, I think it gets more complicated if you are close to hitting the limits: https://www.irs.gov/pub/irs-pdf/p526.pdf

  4. This is a great idea! I need to look into it a bit more.

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