Most Americans donate, on average, between 2-3% of their gross incomes (before taxes) to charitable organizations. The most traditional way of donating to a charitable organization is to write a check and deduct the donation on your taxes (if you itemize). Unfortunately, this is among the least satisfying, least sustainable, and least tax-efficient ways to support charitable causes.
Triple Dipping on Tax Avoidance
Even people of modest means can turn charity into philanthropy and turn donations into meaningful and sustainable grants, by taking advantage of the same triple-dipping tax benefits used by Bill Gates and Mark Zuckerberg in their own philanthropic endeavors.
While the average person obviously can’t create their own billion dollar charitable foundation, the average person does have access to “donor-advised funds” through several retail brokerages. A donor-advised fund is a charitable giving vehicle, sponsored by organizations such as Vanguard Charitable, Fidelity Charitable, and Schwab Charitable, that allows you to make a contribution of assets for future donations and be eligible for an immediate tax deduction for the full value of the assets.
You are not required to disburse the money right away. In fact, you can recommend charitable grants (donations) at any time in the future to any IRS-qualified public charity. Like Bill Gates and Mark Zuckerberg, you never have to pay taxes on the unrealized capital gain, and you still get to deduct the full asset value from your taxes.
A donor-advised fund allows you to donate countless types of assets into your account: cash, bitcoin, publicly traded stock, privately held stock, bonds, ETFs, mutual funds, real estate, etc. Once your donation funds your donor-advised fund account, the assets are liquidated and converted into investments of your choosing (including low-cost index funds). The balance grows in your charitable account without the burden of taxes on dividends or capital gains.
- avoid capital gains taxes
- deduct the full asset value of your donation
- never pay taxes on the income and growth in your fund
Creating Your Own Endowment
If you bought $8,000 worth of Facebook stock, and it is now worth $10,000, you can transfer those shares into your donor-advised fund. You never have to pay capital gains taxes on the $2,000 capital gain. However, you do still get to deduct the entire $10,000 from your income taxes. If the $10,000 grows in your donor-advised fund at 5% for 15 years, your charitable donation will be worth $20,000, which can then be donated completely tax-free.
Alternatively, you can treat your account like a self-sustaining endowment and donate some of your fund each year as the account balance grows tax-free. It’s hardly the Bill & Melinda Gates Foundation, but it’s enough to make you feel warm and fuzzy inside that you too can take the fruits of capitalism and create a legacy fund.
Putting the Fun in Funding
You can name your fund whatever you want, like “The Space Aliens Are Real Fund” or “The Jones Family Scholarship for UFO Studies.” You can have a check issued from your account attributed to the name of your fund only (remaining anonymous) to the local soup kitchen so that you don’t get future solicitations. You can have a check issued from your account to Planned Parenthood or Human Rights Campaign and have it attributed to the name of someone else, like Mike Pence. Or you can attribute it to yourself and bask in the glory of your philanthropy. You can also grant family members administrative rights over the fund, helping to make philanthropy a family cause.
Anyone can donate assets into your fund, and your donor-advised fund will automatically issue the donor a letter allowing them to deduct the full value of the donation from their taxes. So, consider asking loved ones for a donation of a couple shares of appreciated stock to your charitable fund for the holidays, in lieu of an itchy sweater.