Using donor-advised funds in 2021 (and beyond): Donor-advised funds have increased in popularity because of recent legislative changes that affect charitable giving.

• Author: Maloney, Ann Marie

This article discusses donor-advised funds, which have become increasingly popular because they offer a workaround for a complication that a recent legislative change has introduced to charitable giving.

Securing a tax benefit for charitable donations used to be a fairly simple task for middle- to upper-income taxpayers who itemized deductions--they simply included their donations on Schedule A, Itemized Deductions. Often, the main challenge was finding the receipts.

The situation became more complicated in 2017, when the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, increased the standard deduction and also capped the deductible amount of state and local taxes at $10,000. These changes made the standard deduction greater than itemized deductions for many taxpayers, and, as a result, the number of households claiming an itemized deduction for their charitable gifts fell by approximately 20 million, according to the Urban-Brookings Tax Policy Center. (Note that, for 2020 and 2021 only, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, gave filers who take the standard deduction the option to deduct $300 of cash contributions ($600 for joint filers in 2021)).

At the same time, the CARES Act gave taxpayers who donated cash a significant break by allowing them to deduct up to 100%--rather than 60%--of their AGI for cash contributions to qualified charities in 2020. This larger tax benefit for charitable giving (extended to cover 2021 contributions also) only applies to those who itemize.

In order to increase their itemized deductions to an amount above the standard deduction, many taxpayers use a strategy known as bunching, in which they concentrate two years of charitable contributions in one year. The taxpayer itemizes deductions in the contribution year and gets an increased deduction for his or her charitable contributions in that year, while taking the higher standard deduction in the year without contributions. "People are looking at itemizing every other year with the standard deduction so high now," said Mary Kay Foss, a recently retired CPA who advised middle-income filers in northern California.

However, while wanting the tax benefit of making large contributions in one year, many taxpayers also want to spread out when the charity actually receives the contribution over a longer period. Enter the donor-advised fund (DAF), which allows a taxpayer to achieve both of these objectives.

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