Posts

The Inside Scoop on Donor Advised Funds

/in /by

Looking for a different way to donate to your favorite charity? Many investors are finding that donor advised funds are a creative way to contribute dollars while still receiving a tax deduction for their efforts.  The Donor Advised Fund (DAF) is a charitable vehicle created at a public 501(c)3 organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors who receive an immediate tax benefit while recommending grants from the fund to charities of their choice over time.  Instead of making a one-time contribution to your favorite charity, contributors of donor advised funds can either set up their own private fund or use an established DAF and then direct how the contributions are distributed.

 

A Little DAF History

Donor advised funds aren’t new; rather they originated in the 1930’s.  It wasn’t until 1969 that congress established a legal structure for them.  Thirty years later, DAFs took off increasing in popularity and today the funds account for “more than 3 percent of all charitable giving in the United States.” In fact, Fidelity Investment’s Charitable Gift Fund surpassed the United Way as the largest recipient of charitable funds in the country. According to author Helene Olin in Atlantic Monthly, “Donors put $23.27 billion in Donor Advised Funds in 2016, a 7 percent increase since 2015 and 18 percent since 2014.”

How it works:

  1. Contributions are placed into the fund.
  2. Immediate tax deductions are received by the taxpayer for the amount they have ‘donated’ into the fund.
  3. Administration of the DAF including investments (in the stock market) is ongoing.
  4. Either immediately or at some point in the future, the taxpayer makes grants to qualified charities of his/her choice from the fund.

Once the money is in the fund, the dollars cannot be returned to the donor and become the property of the ‘fund’. The underlying issue for nonprofits is the inherent delay between taxpayer donations to the fund and their eventual distribution to the nonprofit.  Appreciative recipient nonprofit organizations argue that because the funds don’t have to be released on any set time horizon, it is very difficult to determine or plan for the contributions. Additionally, because the funds are anonymous, donors can elect to remain in secret making it harder for nonprofits to thank donors and cultivate new supporters. While these are legitimate frustrations for the nonprofits, reports say that donors under age 50 are gravitating more frequently to the Donor Advised Funds. To survive with the next generation of donors, nonprofits are going to have to find a way to work with these funds and find more creative ways to market to donors and receive the funds.

 

 

Who can set up a donor advised fund?

The good news is that donor advised funds are not just for the wealthy. For funds like Charles Schwab’s Charitable fund, anyone can start a fund with as little as $5,000 in irrevocable funds and add additional contributions, if any, of as little as $500. Donors can also control how and when the funds are distributed. Funds can remain in the fund in perpetuity. Unlike charitable foundations, that must by law allocate 5 percent of their dollars annually, DAFs are not bound by the same distribution rules.  For the more affluent investor, supervised, or ‘administered’ funds can be started with a minimum of $250,000 or more and select an individual investment advisor to manage the fund. Of course, administrative and investment fees vary based on the type of account under management.

 

If you have questions about how to start a donor advised fund or financial investment strategies, talk with a PASBA Small Business Advisor.

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

Taxpayers Encouraged to Get Paycheck Check Up

/in /by

If it has been a while since you have looked at your pay stub or reviewed your tax withholding, stop what you’re doing and make a point to do it today.  Circumstances change and with the new Tax Cuts and Job Act (TCJA) in December 2017, there are even more pressing reasons to perform a quick paycheck review. According to the IRS, employers should encourage employees to use the new IRS withholding calculator at www.IRS.gov/w4app to make sure that their federal income tax withholding is in line with the changes made by TCIA.  The danger is that with the changes, employees may be unknowingly withholding too much or too little and will end up owing much more than they planned for 2018 income taxes.  The IRS has also released a set of special plain language Tax Reform Tax Tips, a You Tube video series and other special efforts to help taxpayers better understand the implications of the law.

Among the groups who should check their withholding are:

  • Two-income families.
  • People working two or more jobs or who only work for part of the year.
  • People with children who claim credits such as the Child Tax Credit.
  • People with older dependents, including children age 17 or older.
  • People who itemized deductions in 2017.
  • People with high income and more complex tax returns.
  • People with large tax refunds or large tax bills for 2017.

 

How does the calculator work?

The calculator asks questions about employment history including even partial year or short employment periods. If the taxpayer has more than one part-year job, the withholding calculator can account for this as well, whereas the paper W-4 worksheets do not distinguish between part and full year jobs.

 

Two-income families, multiple job holders

For individuals with more complex tax profiles, such as two or more incomes or multiple jobs, the risks of being under withheld is even greater. Users can even use the withholding calculator to enter income from multiple job or from two employed spouses. It can also ensure that taxpayers apply their 2018 tax deductions, adjustments and credits once rather than multiple times with different employers.

 

Plan for Different Standard Deductions

The TCJA nearly doubled standard deductions and changed several of the itemized deductions for 2018. Individuals who previously itemized deductions on their federal income tax filing may not be able itemize, but may find that they can take the standard deduction, further affecting how much tax payers may need to have withheld.  “With all of the changes this year, it is especially important for taxpayers to fully understand the financial impact on their federal withholding rather than waiting,” says Dave Flynn, owner of Flynn Accounting Solutions in Stoneham, MA. “There’s no reason to have an expensive surprise in next April’s tax filing, when a simple check at the IRS.gov website can help taxpayers correct their withholding amounts now,” he continues.

To make a change to the withholding now, taxpayers will need to complete a new Form W-4 Employee’s Withholding Allowance Certificate to their employer. Waiting until later in the year, means that there will be fewer pay periods remaining to make any necessary correction deductions before year end – which could seriously impact on each paycheck.  Taxpayers with even more complicated situations may want to reach out for guidance.

 

To learn more about tax planning, talk with a Professional Small Business Advisor by clicking Find an Accountant on this page.

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.