How much to front load DAF this year?

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leftcoaster
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How much to front load DAF this year?

Post by leftcoaster » Sun Dec 24, 2017 1:51 pm

High SALT (income), top bracket now and next year. Won’t itemize unless I make big charitable contributions.

I have the means to load up my DAF this year and then itemize for one or more years ahead. So I could take a very large charitable donation this year and itemize for several years starting next.

Given that the top marginal rate will drop, does it make sense to contribute more now? Or is it a wash compared to bunching for alternate years? I’m ignoring the possibility of further share appreciation and maybe that’s an error.

Thoughts?

terran
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Re: How much to front load DAF this year?

Post by terran » Sun Dec 24, 2017 3:42 pm

If you will itemize only in years you make a contribution to your DAF, then to get the most value out of overcoming the standard deduction it seems like maybe contributing just enough to drop below your current tax bracket might make sense? Any less and you'll have future years where you have to contribute and could have waited and used the otherwise advantageous standard deduction, and any more and could have used that charitable deduction in a future year when you could have deducted it in your normal bracket.

Cash
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Re: How much to front load DAF this year?

Post by Cash » Sun Dec 24, 2017 4:29 pm

We are making 5 years' worth of donations this year partly to zero out our tax obligation, but also because our marginal rate will be lower for at least the next 8 years (the term of the current tax reductions). So I think it would make sense to make up to 8 years' worth of donations, as long as that would not drop you to a lower marginal rate this year.

Bmac
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Re: How much to front load DAF this year?

Post by Bmac » Sun Dec 24, 2017 4:40 pm

leftcoaster wrote:
Sun Dec 24, 2017 1:51 pm
High SALT (income), top bracket now and next year. Won’t itemize unless I make big charitable contributions.

I have the means to load up my DAF this year and then itemize for one or more years ahead. So I could take a very large charitable donation this year and itemize for several years starting next.

Given that the top marginal rate will drop, does it make sense to contribute more now? Or is it a wash compared to bunching for alternate years? I’m ignoring the possibility of further share appreciation and maybe that’s an error.

Thoughts?
To be clear, whatever you CONTRIBUTE to a DAF now (2017) will be deductible for 2017 taxes. The subsequent DONATIONS made from the DAF in future years will NOT be deductible for the year donated. So it might certainly make sense tax wise for 2017, but will likely DECREASE the likelihood that you will itemize in 2018 or beyond.

stlutz
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Re: How much to front load DAF this year?

Post by stlutz » Sun Dec 24, 2017 4:47 pm

It really depends on how much you donate on average per year. If that number is $2 or $3K, then doing 5 years worth this week makes a lot of sense. If you're doing $10 or 15K, then every other year may be a better plan. I'm always hesitant to look too far forward just because life circumstances can change a lot over a couple of years which can render advance tax planning moot.

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Artsdoctor
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Re: How much to front load DAF this year?

Post by Artsdoctor » Sun Dec 24, 2017 4:53 pm

You didn't give us enough information to give you a specific answer but there are some generalities.

You can donate as much as you like to your DAF although you're limited to how much you can deduct. If you're transferring cash to your DAF, you can deduct any amount up to 50% of your AGI; if you're donating appreciated assets to your DAF, you can deduct an amount worth up to 30% of your AGI.

If you donate more than the above amounts, the excess would be carried over to the next year; however, if you don't anticipate itemizing next year, then you'd lose that carryover capability.

How much you "front load" depends on a lot of other things as well, as noted above.

You might find this helpful:

https://www.kitces.com/blog/rules-strat ... le-giving/

inbox788
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Re: How much to front load DAF this year?

Post by inbox788 » Mon Dec 25, 2017 1:34 pm

Cash wrote:
Sun Dec 24, 2017 4:29 pm
We are making 5 years' worth of donations this year partly to zero out our tax obligation, but also because our marginal rate will be lower for at least the next 8 years (the term of the current tax reductions). So I think it would make sense to make up to 8 years' worth of donations, as long as that would not drop you to a lower marginal rate this year.
Something like this, but even if it drops you along the marginal rate, as long as it remains higher than future tax years, it may be helpful to donate now rather than later.

On one of the other threads, someone mentioned the 10 year sunset clause in the current law, so up to 10 years might make sense (or is it only 8?), unless you have some expectation you might be itemizing before then. Besides high medical bills, the $10k SALT cap, and $750k mortgage limit (4% of $750k is $30k), I don't see other common reasons to itemize.

Forget share appreciation, that can happen in the DAF as well as outside. The whole point of the DAF is to eliminate that as a factor.

The choice this year vs. next based on tax bracket income favors doing it this year (higher brackets/rates). Some folks may face deduction limitations, but I don't know if this changes next year to improve things, and would require doing simulated taxes with current rules and next year rules (and likely incomplete information), so not practical.

In OPs situation, I would do as many years as practical and affordable that benefited from the higher tax brackets. FWIW, I only did next years donation early, and plan to push off any further DAF contributions till 2019 or later.

leftcoaster
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Re: How much to front load DAF this year?

Post by leftcoaster » Mon Dec 25, 2017 2:42 pm

So looking ahead to next year and following, in the years where I WOULD want to itemize, is this correct?

($10K SALT + mortgage interest + charitable contributions) has to be greater than $24K for itemizing to make sense

For me, $10K SALT and mortgage interest is about $15K, but I consistently give charitable contributions that put me OVER $24K. Let's say that comes to $40K total, of which $25K is charitable.

SO, if I bunch every other year, in itemizing years, I'd get $15K + $50K = $65K . In non itemizing years I get $24K. So in a two year run, I get ($65+$24) = $89K, which beats ($40K + $40K) of itemizing yearly by $9K. Importantly, Pease was repealed (right?) so if I make a larger gift, I don't get limited.

Now this year, my marginal bracket is higher (39.6) and subject to Pease phaseout, but I've already covered the Pease bit "thanks" to SALT. Next year it'll be 37%. (Let's leave AMT out of it).

So a 25K contribution this year = ($25K * 0.396) takes $9900 off the bill. In a future year ($25K * 0.37) will take $9250 out of the picture, for a total save of $650.

In short, as long as I'm itemizing, every $10K donated NOW nets a $260 reduction in tax.

Is this all correct? It doesn't seem like $260 per $10K is a big enough save to bunch more than 2 years of contributions at a time, given the opportunity cost of missing out on appreciation of the money (appreciation to me, not within the DAF).

Cash
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Re: How much to front load DAF this year?

Post by Cash » Tue Dec 26, 2017 4:50 pm

leftcoaster wrote:
Mon Dec 25, 2017 2:42 pm
It doesn't seem like $260 per $10K is a big enough save to bunch more than 2 years of contributions at a time, given the opportunity cost of missing out on appreciation of the money (appreciation to me, not within the DAF).
The appreciation argument doesn't really work that way. If you donate $10k now, you get $3960 back that you can invest in a taxable account. If the market were to double in 8 years, you would have $20k in the DAF and $7920 in the taxable account. If you were to then donate that invested $10k that became $20k, you would get $7400 back to invest in the taxable account. Whether that $520 is worth it to you is a subjective decision, but I doubt a charity would turn it down. Regardless, you don't capture more appreciation by waiting.

leftcoaster
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Re: How much to front load DAF this year?

Post by leftcoaster » Wed Dec 27, 2017 2:34 am

Cash wrote:
Tue Dec 26, 2017 4:50 pm
leftcoaster wrote:
Mon Dec 25, 2017 2:42 pm
It doesn't seem like $260 per $10K is a big enough save to bunch more than 2 years of contributions at a time, given the opportunity cost of missing out on appreciation of the money (appreciation to me, not within the DAF).
The appreciation argument doesn't really work that way. If you donate $10k now, you get $3960 back that you can invest in a taxable account. If the market were to double in 8 years, you would have $20k in the DAF and $7920 in the taxable account. If you were to then donate that invested $10k that became $20k, you would get $7400 back to invest in the taxable account. Whether that $520 is worth it to you is a subjective decision, but I doubt a charity would turn it down. Regardless, you don't capture more appreciation by waiting.
Well the comparison I would use is between giving 10k now and 10 of the future 10k today. Given that the context is do I front load the 10k for the future, part of that decision is the risk of missing out on appreciation of the 10k, the excess of which stays with me. That topic is of course true independent of tax considerations

inbox788
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Re: How much to front load DAF this year?

Post by inbox788 » Wed Dec 27, 2017 2:38 am

Cash wrote:
Tue Dec 26, 2017 4:50 pm
leftcoaster wrote:
Mon Dec 25, 2017 2:42 pm
It doesn't seem like $260 per $10K is a big enough save to bunch more than 2 years of contributions at a time, given the opportunity cost of missing out on appreciation of the money (appreciation to me, not within the DAF).
The appreciation argument doesn't really work that way. If you donate $10k now, you get $3960 back that you can invest in a taxable account. If the market were to double in 8 years, you would have $20k in the DAF and $7920 in the taxable account. If you were to then donate that invested $10k that became $20k, you would get $7400 back to invest in the taxable account. Whether that $520 is worth it to you is a subjective decision, but I doubt a charity would turn it down. Regardless, you don't capture more appreciation by waiting.
Ignoring inflation, if you donated $7920 to a charity, it's $520 more than the $7400 from waiting, but if you wanted to spend it, you'd still owe capital gains tax on the $3960 gains/doubling depending your tax bracket, so it's a +/- $500 decision depending on your individual circumstance.

Cash
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Re: How much to front load DAF this year?

Post by Cash » Wed Dec 27, 2017 9:56 am

leftcoaster wrote:
Wed Dec 27, 2017 2:34 am
Cash wrote:
Tue Dec 26, 2017 4:50 pm
leftcoaster wrote:
Mon Dec 25, 2017 2:42 pm
It doesn't seem like $260 per $10K is a big enough save to bunch more than 2 years of contributions at a time, given the opportunity cost of missing out on appreciation of the money (appreciation to me, not within the DAF).
The appreciation argument doesn't really work that way. If you donate $10k now, you get $3960 back that you can invest in a taxable account. If the market were to double in 8 years, you would have $20k in the DAF and $7920 in the taxable account. If you were to then donate that invested $10k that became $20k, you would get $7400 back to invest in the taxable account. Whether that $520 is worth it to you is a subjective decision, but I doubt a charity would turn it down. Regardless, you don't capture more appreciation by waiting.
Well the comparison I would use is between giving 10k now and 10 of the future 10k today. Given that the context is do I front load the 10k for the future, part of that decision is the risk of missing out on appreciation of the 10k, the excess of which stays with me. That topic is of course true independent of tax considerations
So you're essentially saying that you have $20k now that you could give. You could either donate $20k all at once, or you could donate $10k now and hope that the remaining $10k doubles to $20k at some point in the future, and you would then give another $10k and keep $10k for yourself. That's fine, I guess. Usually the argument is that you can take a larger deduction in the future by capturing the gains from the earmarked money in a taxable account (i.e., donating the entire $20k in the future), and that's what I was addressing. Under your reasoning, why donate at all while you are alive? Just leave $10k in your will.
inbox788 wrote:
Wed Dec 27, 2017 2:38 am
Ignoring inflation, if you donated $7920 to a charity, it's $520 more than the $7400 from waiting, but if you wanted to spend it, you'd still owe capital gains tax on the $3960 gains/doubling depending your tax bracket, so it's a +/- $500 decision depending on your individual circumstance.
Fair point.

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