Am I understanding this right about DAFs? If so...wow

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Galaga
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Am I understanding this right about DAFs? If so...wow

Post by Galaga » Sun Nov 18, 2018 9:08 am

My wife and I are getting our financial house in order: recently let go of our advisor, rolled over/transferred many of our assets to Vanguard, developed Investor Policy Statement, bought low cost index funds across our various buckets, reading Bogleheads and taking your great advice. In the process of transferring our brokerage account, we realized that there are some not so great funds that we should probably get rid of (thank you blevine). Unfortunately these funds have some gains that I'd rather not pay taxes on when selling. We've also discovered DAFs and are thinking about opening one at Fidelity. We give ~5-10% of our income to charity depending on the year, one of which is our church, to which we give weekly. Here are the funds in question, all of which have long term gain and most of which is noncovered by Vanguard (bought prior to 2012?)

FINSX Fidelity Advisor® New Insights Fund Class I
(SpecID) 447.0830 $13.86 $6,196.57 $14,458.66 — $8,262.09 $8,262.09 total gain

ODVYX Oppenheimer Developing Markets Fund Class Y
(SpecID) 168.6860 — $5,260.00 $6,509.59 –$32.79 $1,282.38 $1,249.59 total gain

TRAIX T. Rowe Price Capital Appreciation Fund I Class
(SpecID) 562.9400 — $10,000.57 $16,617.99 –$27.02 $6,644.44 $6,617.42 total gain

PRVIX T. Rowe Price Small-Cap Value Fund I Class
(SpecID) 315.5070 — $12,433.83 $15,444.07 –$93.15 $3,103.39 $3,010.24 total gain

2018 tax brackets:35% federal, 6% state, 20% CG

The way I see it we have three options:
1. Sell, pay taxes on gains, and buy low cost index funds with proceeds. Tax hit would be $3827.87 (.2*(8262+1249+6617+3010))
2. Donate to DAF. DAF gets current market value of all funds ($53,028). We get tax break of $21,741 for 2018 (.41 * $53,028).
3. Keep these not so great funds, let them grow, and then donate to DAF to get larger tax break in the future.

Questions:
1. Do I have the math and options correct? ie what am I missing?
2. Would like to reach FI (and possibly retire) in mid 50s. Donating to DAF now while we're in a high tax bracket seems like the smart play. It might even lower our FI number if we build sizable DAF and send monthly/quartely payments to church from DAF in retirement rather than paying with our checking account. Is this a reasonable assumption?

Thanks in advance!

aristotelian
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Re: Am I understanding this right about DAFs? If so...wow

Post by aristotelian » Sun Nov 18, 2018 9:26 am

One consideration is that you get the standard deduction, so the benefit of donations is only from amounts you give above the standard deduction.

Also keep in mind that the DAF will charge expenses, so it might behoove you to do #3. Basically the choice is between staying in non optimal funds vs the DAF fee dragging against your donation fund.

In the meantime, turn off dividend reinvestment so you don't compound the problem.
Last edited by aristotelian on Sun Nov 18, 2018 9:31 am, edited 1 time in total.

moehoward
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Re: Am I understanding this right about DAFs? If so...wow

Post by moehoward » Sun Nov 18, 2018 9:26 am

Why can't you put new money in index funds and slowly right the ship? You could sell ODVYX and probably PRVIX this year and the rest next year. The DAF idea is not my kind of financial plan so I have no comment on it.

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Artsdoctor
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Re: Am I understanding this right about DAFs? If so...wow

Post by Artsdoctor » Sun Nov 18, 2018 9:36 am

Galaga,

Your concept is correct but I'm not sure about your math.

Make sure you're calculating your marginal investment tax correctly. You're probably not paying 20% capital gains tax on the entire amount, but you're probably subject to the 3.8% NIIT. Likewise, are you figuring in your state income tax? Do you know exactly how much your deductions are worth? The new tax law has completely different numbers than what you're used to dealing with so unless you're using a software program, you may not have your numbers right.

But the concept is right on point.

stan1
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Re: Am I understanding this right about DAFs? If so...wow

Post by stan1 » Sun Nov 18, 2018 9:37 am

I'll let someone else do the math but there are a few more factors:

1) These funds probably have capital gains distributions every year. If you sell them or donate to them via the DAF you won't have that expense. If you estimate the tax you would owe for the next 10 or 20 years the cost of keeping them gets worse. I would not keep them.

2) You can make qualified charitable distributions from your Traditional IRAs to charity. Tax on traditional IRAs is at your marginal tax rate in retirement. If you have a high tax rate in retirement this is probably something you'll want to consider so you might not want to over fund your DAF. How many years of giving with the $53K cover? It sounds like it might be under 10 in which case the DAF seems like a good idea.

3) Is your church set up to accept the DAF contribution or do they really survive off the cash every week? My in laws were part of a 50 person mostly older blue collar congregation. The consistent $100/week my father in law gave them was a big part of the preacher's income. That church would not have been set up to deal with a DAF. Larger congregations with higher income members should already have the process down. Could you give quarterly or annually?

4) For 2018 math gets more complicated because of the new federal limits on state and local tax deductions. If you don't have a large mortgage you might now be taking the standard deduction instead of itemizing on your federal return. If you donate to the DAF you'd be itemizing that year so you would also want to try to maximize any other deductions in the same year before you go back to the standard deduction in future years. Some states will let you itemize on your state return even if you take the standard deduction on your federal return.

In summary, because of the future tax on capital gains distributions I'd take action now before those distributions pay out in December. If you are giving $5-10K per year to charity and are well under 70.5 I'd go the DAF route and try to maximize any other deductions this year as well.
Last edited by stan1 on Sun Nov 18, 2018 9:48 am, edited 2 times in total.

stan1
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Re: Am I understanding this right about DAFs? If so...wow

Post by stan1 » Sun Nov 18, 2018 9:43 am

aristotelian wrote:
Sun Nov 18, 2018 9:26 am
Also keep in mind that the DAF will charge expenses, so it might behoove you to do #3. Basically the choice is between staying in non optimal funds vs the DAF fee dragging against your donation fund.
The DAF has expenses but it is invested and has income that can cover those expenses. Likely still cheaper than paying tax on the capital gains distributions but the numbers would have to be run if OP wants to optimize at that level.

cadreamer2015
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Re: Am I understanding this right about DAFs? If so...wow

Post by cadreamer2015 » Sun Nov 18, 2018 9:53 am

As someone else said, unless you already have $24,000 in itemized deductions you won’t get the benefit of deducting the entire amount of your donation to a DAF. The new standard deduction for MFJ taxpayers is $24,000, and only deductions in excess of the standard deduction reduce your taxes.

Another idea would be to directly gift shares of the taxable mutual funds you would otherwise sell or donate to a DAF. Many charities have brokerage accounts and accept donations of securities. You don’t have to sell first, and thus avoid paying capital gains taxes. Perhaps you could give mutual fund shares to your church quarterly or annually instead of donating cash weekly. With your level of charitable giving you could make a major dent in the total amount of old mutual funds in a few years.
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Chip
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Re: Am I understanding this right about DAFs? If so...wow

Post by Chip » Sun Nov 18, 2018 10:02 am

I agree with others that the 3.8% NIIT likely applies, making your cap gains rate 23.8%. Also the question of standard deduction vs. itemizing in determining deductibility of DAF contributions. Though if you can't deduct contributions that you're making now does it really matter if you can't deduct a donation to the DAF? There was a suggestion to consider qualified charitable distributions from your IRA. Note that you can't do this until you've reached age 70.5.

Since you're donating 5-10% of your income, with taxable income of at least 400k (35% bracket), you'd empty the DAF within 2-3 years. I don't share the concern mentioned about the donation frequency to the church. My Fidelity DAF doesn't care how often I suggest donations. I suspect monthly or weekly would be fine if necessary. But I would also suggest that the church should be able to manage quarterly cash donations, which is what comes from the DAF.

Given your situation I would absolutely donate all of the funds to the DAF. They are high expense actively managed funds. So you get the double whammy of ongoing expenses plus occasional large cap gain distributions. I agree with the earlier poster to get it done before this year's capital gain distributions. Note that the Vanguard DAF has higher minimum funding levels and higher minimum donation levels than some other DAFs. If that is important you should know that you can have your investments at Vanguard and your DAF somewhere else, like Fidelity. Minimums at Fidelity are 5,000 initial funding and $50 donations. There are some posters here who have successfully "pulled" holdings from Vanguard directly into the Fidelity DAF. Search on DAF or Donor Advised Fund here to find many past threads.

letsgobobby
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Re: Am I understanding this right about DAFs? If so...wow

Post by letsgobobby » Sun Nov 18, 2018 10:07 am

Galaga wrote:
Sun Nov 18, 2018 9:08 am
My wife and I are getting our financial house in order: recently let go of our advisor, rolled over/transferred many of our assets to Vanguard, developed Investor Policy Statement, bought low cost index funds across our various buckets, reading Bogleheads and taking your great advice. In the process of transferring our brokerage account, we realized that there are some not so great funds that we should probably get rid of (thank you blevine). Unfortunately these funds have some gains that I'd rather not pay taxes on when selling. We've also discovered DAFs and are thinking about opening one at Fidelity. We give ~5-10% of our income to charity depending on the year, one of which is our church, to which we give weekly. Here are the funds in question, all of which have long term gain and most of which is noncovered by Vanguard (bought prior to 2012?)

FINSX Fidelity Advisor® New Insights Fund Class I
(SpecID) 447.0830 $13.86 $6,196.57 $14,458.66 — $8,262.09 $8,262.09 total gain

ODVYX Oppenheimer Developing Markets Fund Class Y
(SpecID) 168.6860 — $5,260.00 $6,509.59 –$32.79 $1,282.38 $1,249.59 total gain

TRAIX T. Rowe Price Capital Appreciation Fund I Class
(SpecID) 562.9400 — $10,000.57 $16,617.99 –$27.02 $6,644.44 $6,617.42 total gain

PRVIX T. Rowe Price Small-Cap Value Fund I Class
(SpecID) 315.5070 — $12,433.83 $15,444.07 –$93.15 $3,103.39 $3,010.24 total gain

2018 tax brackets:35% federal, 6% state, 20% CG

The way I see it we have three options:
1. Sell, pay taxes on gains, and buy low cost index funds with proceeds. Tax hit would be $3827.87 (.2*(8262+1249+6617+3010))
2. Donate to DAF. DAF gets current market value of all funds ($53,028). We get tax break of $21,741 for 2018 (.41 * $53,028).
3. Keep these not so great funds, let them grow, and then donate to DAF to get larger tax break in the future.

Questions:
1. Do I have the math and options correct? ie what am I missing?
2. Would like to reach FI (and possibly retire) in mid 50s. Donating to DAF now while we're in a high tax bracket seems like the smart play. It might even lower our FI number if we build sizable DAF and send monthly/quartely payments to church from DAF in retirement rather than paying with our checking account. Is this a reasonable assumption?

Thanks in advance!
We donated some of the last of our individual stock holdings to a DAF when we went 100% with index funds. We now try for close to 100% annual turnover in our DAF to minimize carrying costs, but otherwise I agree with your plan.

Mike Scott
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Re: Am I understanding this right about DAFs? If so...wow

Post by Mike Scott » Sun Nov 18, 2018 10:33 am

I would also suggest going with the DAF but only after checking to make sure the DAF will recognize your chosen charities to issue checks.

increment
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Re: Am I understanding this right about DAFs? If so...wow

Post by increment » Sun Nov 18, 2018 10:56 am

If you donate property and want to claim the current fair-market value as a deduction, you are limited to 30% of your AGI per year.

aristotelian
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Re: Am I understanding this right about DAFs? If so...wow

Post by aristotelian » Sun Nov 18, 2018 12:42 pm

stan1 wrote:
Sun Nov 18, 2018 9:43 am
aristotelian wrote:
Sun Nov 18, 2018 9:26 am
Also keep in mind that the DAF will charge expenses, so it might behoove you to do #3. Basically the choice is between staying in non optimal funds vs the DAF fee dragging against your donation fund.
The DAF has expenses but it is invested and has income that can cover those expenses. Likely still cheaper than paying tax on the capital gains distributions but the numbers would have to be run if OP wants to optimize at that level.
Generally if the funds were equal, the .6% or whatever management fee is a major drag. It would be better to grow the funds in taxable, then add to the DAF when you are near ready to spend.

RetiredArtist
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Re: Am I understanding this right about DAFs? If so...wow

Post by RetiredArtist » Sun Nov 18, 2018 12:48 pm

stan1 wrote:
Sun Nov 18, 2018 9:37 am
I'll let someone else do the math but there are a few more factors:


2) You can make qualified charitable distributions from your Traditional IRAs to charity. Tax on traditional IRAs is at your marginal tax rate in retirement. If you have a high tax rate in retirement this is probably something you'll want to consider so you might not want to over fund your DAF. How many years of giving with the $53K cover? It sounds like it might be under 10 in which case the DAF seems like a good idea.
My understanding is that you have to be 70.5 years old to make Qualified Charitable Distributions from your Traditional IRA.

letsgobobby
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Re: Am I understanding this right about DAFs? If so...wow

Post by letsgobobby » Sun Nov 18, 2018 1:05 pm

aristotelian wrote:
Sun Nov 18, 2018 12:42 pm
stan1 wrote:
Sun Nov 18, 2018 9:43 am
aristotelian wrote:
Sun Nov 18, 2018 9:26 am
Also keep in mind that the DAF will charge expenses, so it might behoove you to do #3. Basically the choice is between staying in non optimal funds vs the DAF fee dragging against your donation fund.
The DAF has expenses but it is invested and has income that can cover those expenses. Likely still cheaper than paying tax on the capital gains distributions but the numbers would have to be run if OP wants to optimize at that level.
Generally if the funds were equal, the .6% or whatever management fee is a major drag. It would be better to grow the funds in taxable, then add to the DAF when you are near ready to spend.
It's a drag, but taxable investments have a tax drag as well, which is avoided in the DAF.

stlutz
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Re: Am I understanding this right about DAFs? If so...wow

Post by stlutz » Sun Nov 18, 2018 1:34 pm

I would also suggest going with the DAF but only after checking to make sure the DAF will recognize your chosen charities to issue checks.
As long as it's a 501c3, I've never heard of anyone who has had their grant recommendation declined by the Fidelity/Schwab DAFs. Many people here give to their churches through them. I've given to a few very small charities through mine without issue as well (the DAF does do their due diligence to make sure it is a legit charity before issuing the grant, of course).

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Earl Lemongrab
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Re: Am I understanding this right about DAFs? If so...wow

Post by Earl Lemongrab » Sun Nov 18, 2018 3:18 pm

aristotelian wrote:
Sun Nov 18, 2018 12:42 pm
Generally if the funds were equal, the .6% or whatever management fee is a major drag. It would be better to grow the funds in taxable, then add to the DAF when you are near ready to spend.
The ERs on at least some of those funds exceed the .6 extra for the DAF. Besides, doing it at once might be beneficial tax-wise depending on whether the OP is able to deduct.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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dm200
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Re: Am I understanding this right about DAFs? If so...wow

Post by dm200 » Sun Nov 18, 2018 4:21 pm

Mike Scott wrote:
Sun Nov 18, 2018 10:33 am
I would also suggest going with the DAF but only after checking to make sure the DAF will recognize your chosen charities to issue checks.
We have the Fidelity DAF. Our experience is that we have never found a charity for which Fidelity would not do a "grant" upon our request. These include three places of worship - one very, very small - a second small and a third mid sized. They are in two different denominations.

Katietsu
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Re: Am I understanding this right about DAFs? If so...wow

Post by Katietsu » Sun Nov 18, 2018 4:42 pm

I think it sounds like a good idea. I would recommend getting started now, especially if you are going to be moving between brokerages. It can sometimes take a bit longer than anticipated.

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dm200
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Re: Am I understanding this right about DAFs? If so...wow

Post by dm200 » Sun Nov 18, 2018 4:54 pm

While not completely trivial, I regard the added investment expense in a DAF as well worth the benefits received. Among the benefits (there may be more):

1. Complete asset protection (the funds are not yours)
2. Ability to make anonymous "grants". You will not get on solicitations
3. Ability to allocate funds in different investment types
4. Request grants online is just a minute or two
5. Distribute to charities in a way that is best for the charity - while taking the tax deduction when best for you.
6. Ability to fund desired charities over many, many years - and name successors to do this for a very, very long time
7. Others can contribute to your DAF

Traveller
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Re: Am I understanding this right about DAFs? If so...wow

Post by Traveller » Sun Nov 18, 2018 4:57 pm

Mike Scott wrote:
Sun Nov 18, 2018 10:33 am
I would also suggest going with the DAF but only after checking to make sure the DAF will recognize your chosen charities to issue checks.
You can search GuideStar to see if your charity is already registered.
https://www.guidestar.org/Home.aspx

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Artsdoctor
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Re: Am I understanding this right about DAFs? If so...wow

Post by Artsdoctor » Sun Nov 18, 2018 6:44 pm

aristotelian wrote:
Sun Nov 18, 2018 9:26 am
One consideration is that you get the standard deduction, so the benefit of donations is only from amounts you give above the standard deduction.

Also keep in mind that the DAF will charge expenses, so it might behoove you to do #3. Basically the choice is between staying in non optimal funds vs the DAF fee dragging against your donation fund.

In the meantime, turn off dividend reinvestment so you don't compound the problem.
It is true that the current $24,000 standard deduction is quite generous. It wouldn't really be much benefit if someone's deductions totalled $25,000 since the net savings would be on the $1,000 over the standard deduction.

However, the OP here would benefit quite a bit. The DAF deduction would be $53,000, he'd almost certainly have a $10,000 maximum SALT deduction, and all of his mortgage interest would be deductible (up to the principal borrowed amount of $750,000). So I can easily see where his total deductions might be $70,000 (give or take).

Second, the mutual funds he's describing are somewhat expensive with expense ratios between 0.6-1.0%. I wouldn't be concerned about DAF expenses of 0.6% acting as a drag because those funds are actually acting as a bigger drag to him in his taxable account.

Third, I'd urge anyone with a DAF to view those expenses in the DAF as the cost of doing business, and just accept them. Once you donate those appreciated shares, they're no longer yours although you can direct the money in whatever way you see fit (money market or aggressive investments, for example). The better the investments do, the more you donate; if the investments decrease in value, you'll donate less. This is similar to what we'd do in life without a DAF (if I make a lot of money one year, I'll donate more; if I make less, I'll donate less [usually]).

Overall, it's really hard to NOT have a DAF if you're interested in giving. Smart investors will almost certainly batch donations to a DAF--large sums one year, and then taking the $24,000 standard deduction the next.

As an aside, it's true that one can donate appreciated shares directly to a charity. However, this can be cumbersome and it requires that the charity has an account that will readily accept those mutual fund shares. It's also true that a QCD is an excellent choice for donating an RMD but you don't have that option unless you're 70-1/2.

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dm200
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Re: Am I understanding this right about DAFs? If so...wow

Post by dm200 » Sun Nov 18, 2018 6:59 pm

Some small charitable entities are not very good at accepting appreciated securities.

If you want do donate small/modest amounts - it can be difficult to get the right number of shares for direct donation

These situations can be handled by using a DAF.

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Re: Am I understanding this right about DAFs? If so...wow

Post by aristotelian » Sun Nov 18, 2018 7:25 pm

Artsdoctor wrote:
Sun Nov 18, 2018 6:44 pm
aristotelian wrote:
Sun Nov 18, 2018 9:26 am
One consideration is that you get the standard deduction, so the benefit of donations is only from amounts you give above the standard deduction.

Also keep in mind that the DAF will charge expenses, so it might behoove you to do #3. Basically the choice is between staying in non optimal funds vs the DAF fee dragging against your donation fund.

In the meantime, turn off dividend reinvestment so you don't compound the problem.
It is true that the current $24,000 standard deduction is quite generous. It wouldn't really be much benefit if someone's deductions totalled $25,000 since the net savings would be on the $1,000 over the standard deduction.

However, the OP here would benefit quite a bit. The DAF deduction would be $53,000, he'd almost certainly have a $10,000 maximum SALT deduction, and all of his mortgage interest would be deductible (up to the principal borrowed amount of $750,000). So I can easily see where his total deductions might be $70,000 (give or take).

Second, the mutual funds he's describing are somewhat expensive with expense ratios between 0.6-1.0%. I wouldn't be concerned about DAF expenses of 0.6% acting as a drag because those funds are actually acting as a bigger drag to him in his taxable account.

Third, I'd urge anyone with a DAF to view those expenses in the DAF as the cost of doing business, and just accept them. Once you donate those appreciated shares, they're no longer yours although you can direct the money in whatever way you see fit (money market or aggressive investments, for example). The better the investments do, the more you donate; if the investments decrease in value, you'll donate less. This is similar to what we'd do in life without a DAF (if I make a lot of money one year, I'll donate more; if I make less, I'll donate less [usually]).

Overall, it's really hard to NOT have a DAF if you're interested in giving. Smart investors will almost certainly batch donations to a DAF--large sums one year, and then taking the $24,000 standard deduction the next.

As an aside, it's true that one can donate appreciated shares directly to a charity. However, this can be cumbersome and it requires that the charity has an account that will readily accept those mutual fund shares. It's also true that a QCD is an excellent choice for donating an RMD but you don't have that option unless you're 70-1/2.
To be clear, I am a big fan of DAFs and have one myself. Only question is how to optimize it.

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Re: Am I understanding this right about DAFs? If so...wow

Post by TN_Boy » Sun Nov 18, 2018 8:14 pm

Artsdoctor wrote:
Sun Nov 18, 2018 6:44 pm
aristotelian wrote:
Sun Nov 18, 2018 9:26 am
One consideration is that you get the standard deduction, so the benefit of donations is only from amounts you give above the standard deduction.

Also keep in mind that the DAF will charge expenses, so it might behoove you to do #3. Basically the choice is between staying in non optimal funds vs the DAF fee dragging against your donation fund.

In the meantime, turn off dividend reinvestment so you don't compound the problem.
It is true that the current $24,000 standard deduction is quite generous. It wouldn't really be much benefit if someone's deductions totalled $25,000 since the net savings would be on the $1,000 over the standard deduction.

However, the OP here would benefit quite a bit. The DAF deduction would be $53,000, he'd almost certainly have a $10,000 maximum SALT deduction, and all of his mortgage interest would be deductible (up to the principal borrowed amount of $750,000). So I can easily see where his total deductions might be $70,000 (give or take).

Second, the mutual funds he's describing are somewhat expensive with expense ratios between 0.6-1.0%. I wouldn't be concerned about DAF expenses of 0.6% acting as a drag because those funds are actually acting as a bigger drag to him in his taxable account.

Third, I'd urge anyone with a DAF to view those expenses in the DAF as the cost of doing business, and just accept them. Once you donate those appreciated shares, they're no longer yours although you can direct the money in whatever way you see fit (money market or aggressive investments, for example). The better the investments do, the more you donate; if the investments decrease in value, you'll donate less. This is similar to what we'd do in life without a DAF (if I make a lot of money one year, I'll donate more; if I make less, I'll donate less [usually]).

Overall, it's really hard to NOT have a DAF if you're interested in giving. Smart investors will almost certainly batch donations to a DAF--large sums one year, and then taking the $24,000 standard deduction the next.

As an aside, it's true that one can donate appreciated shares directly to a charity. However, this can be cumbersome and it requires that the charity has an account that will readily accept those mutual fund shares. It's also true that a QCD is an excellent choice for donating an RMD but you don't have that option unless you're 70-1/2.
Very much agree with this post. I'll second your last paragraph -- I found the difficulty of getting appreciated shares directly to charities sufficiently painful (or impossible in many cases) that it drove us to use a DAF. And we love it.

Batching deductions seems like an obvious winner for many families, and as you note, might pull in other deductions in the "batching year" that the larger standard deduction was making useless.

Another small benefit of DAFs is that you can donate anonymously if you wish.

Galaga
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Re: Am I understanding this right about DAFs? If so...wow

Post by Galaga » Sun Nov 18, 2018 10:39 pm

aristotelian wrote:
Sun Nov 18, 2018 9:26 am
One consideration is that you get the standard deduction, so the benefit of donations is only from amounts you give above the standard deduction.

Also keep in mind that the DAF will charge expenses, so it might behoove you to do #3. Basically the choice is between staying in non optimal funds vs the DAF fee dragging against your donation fund.

In the meantime, turn off dividend reinvestment so you don't compound the problem.
Thank you for the advice on dividend reinvestment, will definitely do that.

We've spoken to our accountant re: estimated taxes for 2018 and they've told us to continue itemizing this year, mainly due to charitable giving. Unforturnately our taxes are expected to go WAY UP this year due to changes in the deductions under the new tax plan (even though our federal tax rate decreased). Donating to DAF might give us a nice check back from Uncle Sam!

Galaga
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Re: Am I understanding this right about DAFs? If so...wow

Post by Galaga » Sun Nov 18, 2018 11:06 pm

Artsdoctor wrote:
Sun Nov 18, 2018 9:36 am
Galaga,

Your concept is correct but I'm not sure about your math.

Make sure you're calculating your marginal investment tax correctly. You're probably not paying 20% capital gains tax on the entire amount, but you're probably subject to the 3.8% NIIT. Likewise, are you figuring in your state income tax? Do you know exactly how much your deductions are worth? The new tax law has completely different numbers than what you're used to dealing with so unless you're using a software program, you may not have your numbers right.

But the concept is right on point.
Thanks for the comment. I'm a newbie and still figuring this out. Do we pay 15% capital gains up to a certain threshold then 20% above that threshold? I have not seen anything written about this so am very interested to learn more. Thank you for pointing out the NIIT and state. If I recalculate, then I'm at 20% + 6% state + 3.8% NIIT. 29.8%?!?!?! That's entirely too much tax to pay for investing in my opinion. That comes to $5703.

We've been told by our accountant that we should continue to itemize deductions for 2018, mainly due to charitable giving. Our other deductions have gone down so much that our taxes will be going up significantly despite having a lower federal tax bracket. Weren't our taxes supposed to go down under the new tax plan? :oops:

rkhusky
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Re: Am I understanding this right about DAFs? If so...wow

Post by rkhusky » Mon Nov 19, 2018 7:39 am

Galaga wrote:
Sun Nov 18, 2018 11:06 pm
Weren't our taxes supposed to go down under the new tax plan? :oops:
The cap on state and local taxes affects some more than others. If your taxes are going up, that must mean you are rich :-).

drzzzzz
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Re: Am I understanding this right about DAFs? If so...wow

Post by drzzzzz » Mon Nov 19, 2018 3:20 pm

We are doing something similar this year with Vanguard Capital Opportunity Fund which is planning to distribute 8.96% of the funds as a capital gains distribution this year - we have started the process of transferring the funds to a Fidelity DAF and take the donation as a charitable deduction rather than have to pay taxes on the distribution.

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PhysicianOnFIRE
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Re: Am I understanding this right about DAFs? If so...wow

Post by PhysicianOnFIRE » Mon Nov 19, 2018 5:34 pm

Galaga wrote:
Sun Nov 18, 2018 11:06 pm
Artsdoctor wrote:
Sun Nov 18, 2018 9:36 am
Galaga,

Your concept is correct but I'm not sure about your math.

Make sure you're calculating your marginal investment tax correctly. You're probably not paying 20% capital gains tax on the entire amount, but you're probably subject to the 3.8% NIIT. Likewise, are you figuring in your state income tax? Do you know exactly how much your deductions are worth? The new tax law has completely different numbers than what you're used to dealing with so unless you're using a software program, you may not have your numbers right.

But the concept is right on point.
Thanks for the comment. I'm a newbie and still figuring this out. Do we pay 15% capital gains up to a certain threshold then 20% above that threshold? I have not seen anything written about this so am very interested to learn more. Thank you for pointing out the NIIT and state. If I recalculate, then I'm at 20% + 6% state + 3.8% NIIT. 29.8%?!?!?! That's entirely too much tax to pay for investing in my opinion. That comes to $5703.

We've been told by our accountant that we should continue to itemize deductions for 2018, mainly due to charitable giving. Our other deductions have gone down so much that our taxes will be going up significantly despite having a lower federal tax bracket. Weren't our taxes supposed to go down under the new tax plan? :oops:
Federal income taxes are down for many of us (but maybe not if you're single in a high cost of living area). There were no changes that I'm aware of to the taxes on long-term capital gains or qualified dividends. The 0% bracket is no longer tied to the old 15% tax bracket, but the dollar amount of the bracket remains the same (inflation adjusted).

I'm in a similar boat. 15% + 3.8% + 9.85% state income tax on LTCG and QD. I hear people quote the flat 15% quite often (not as much here at Bogleheads but elsewhere) when it can be twice that or more.

Silver lining: it makes utilizing a DAF that much more valuable. I opened my first one five years ago and have been stuffing it ever since.

:beer
-PoF

inbox788
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Re: Am I understanding this right about DAFs? If so...wow

Post by inbox788 » Wed Nov 21, 2018 12:29 am

Sounds like a DAF would be great for your situation!

You could send a $50 or $100 weekly donation via the DAF, but there is a cost to Fidelity as well as the church. I'd guess it's a couple of dollars to print and mail out checks, so doing it 52 times a year would add up, eventually requiring higher fees or less other services. It's not that Fidelity couldn't afford it, as I suspect they're profiting handsomely running their charitable program (charging AUM, hawking their funds, and getting lots of good press and good will). Also, someone at the receiving end would have to process the extra weekly paperwork deposits and that's 52 chances a year things go wrong. I decided quarterly was sufficiently frequent, and have had 2 mishaps so far on the receiving end, mainly due to disorganized volunteer help.

OP, as long as you can use the deduction, and nothing changes, the best course of action is #3, "3. Keep these not so great funds, let them grow, and then donate to DAF to get larger tax break in the future." If your tax rates go up, it would be even better. And the base of comparison is having additional after tax cash you're donating directly to charities today. There is market risk, but the main reason for the benefit is that I expect the market will be higher in the future and you get a bigger tax break. Meanwhile, you still retain control, and if the market tanks, you still can decide if you or the charities will take the some of the losses. You may decide you will reduce your contribution so you're even or other if you're in a dire situation. An option you wouldn't have if the funds where already contributed to the DAF, but realistically, this situation seems very unlikely. Still, you may want to spread the risk out over time in case the future plans change, which often they inevitably do.
Artsdoctor wrote:
Sun Nov 18, 2018 6:44 pm
Second, the mutual funds he's describing are somewhat expensive with expense ratios between 0.6-1.0%. I wouldn't be concerned about DAF expenses of 0.6% acting as a drag because those funds are actually acting as a bigger drag to him in his taxable account.
Having a high expense ratio is a cost that you'd need to figure out the funds return and tax rate effect to overcome so the benefits of holding on longer outweigh the additional drags. If you consider the simple situation where funds grow 5% in or out of the DAF and total 25% additional gains and tax breaks, you'll lose 1%/year or 5% to fees vs. 20% of the 25% additional tax benefit (or about 5%). They seem similar enough that the timing of taking out isn't that compelling either way (option 2 or 3 are more similar than if the expense fees were low with option 3), so other factors may dictate the timing (e.g. need for tax deduction this year vs. a few years in the future).

InertiaMan
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Re: Am I understanding this right about DAFs? If so...wow

Post by InertiaMan » Wed Nov 21, 2018 5:28 am

OP, a DAF is a no-brainer in your situation.

It sounds like your tax accountant is telling you to itemize this year, even in the absence of this $53k DAF option, so you will get the full benefit from the $53k donation if you proceed. I wouldn't wait for the funds to (possibly) increase; get it done now, before CG distributions.

Even ignoring your $53k "bad funds", I think your financial situation is ripe for a DAF. Given the scale of your giving, your tax accountant should work w/ you to develop a DAF-centric tax strategy: possibly isolating all your donations to the DAF into every 2nd or 3rd or 4th year, and taking the standard deduction in the other years. The optimal approach will take into account the variability of your income (bonuses and stock options can spike earnings, for example), the 50% of AGI limit on cap gains gifts (assuming 20%/30% special cases don't apply), etc.

Example: Taking the minimum numbers for your tax rate, you are earning $400k as a couple and donating $20k-40k per year. Lets assume you donate $33.3k every year for 3 years, and itemize deductions each year. After 3 years, you get $100k in deductions total. Far better to donate $100k every third year, and take the $24k in other two years, for $148k of total deductions. The DAF spreads the timing of the distributions to the charities so there is no tangible difference at the receiving end.

And do NOT have any anxiety about the mechanics of the DAF, or possibility of them not distributing to your recommended recipient. If anything, having a DAF, in my opinion, makes giving easier. Just a couple mouse clicks and its done. The only issue I've run into is the minimum donation, which is $500 at Vanguard and $50 at Fidelity. I may move my DAF to Fidelity because the $500 limit is a real inhibitor to donating to smaller causes beyond my two primary recipients. Consider that factor when you choose your destination.

Lazareth
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Re: Am I understanding this right about DAFs? If so...wow

Post by Lazareth » Wed Nov 21, 2018 11:35 am

aristotelian wrote:
Sun Nov 18, 2018 9:26 am
In the meantime, turn off dividend reinvestment so you don't compound the problem.
Dividend re-investment question:

Hi aristotelian, In your reply to Galaga's DAF's question you added, "turn off dividend reinvestment so you don't compound the problem...". My question: Is it the bh way to turn off dividend reinvestment in most cases, and accumulate that money for rebalancing?

My ex-manager left some bond and reit funds in my taxable account, even though there's for room for them the IRA's, so I'll clean those up eventually but I had not considered the implications of the dividend reinvestment option. For the IRA's on other hand, it seems that the impact would not apply to retirement accounts, am I correct? Thank you!

aristotelian
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Re: Am I understanding this right about DAFs? If so...wow

Post by aristotelian » Wed Nov 21, 2018 2:04 pm

Lazareth wrote:
Wed Nov 21, 2018 11:35 am
aristotelian wrote:
Sun Nov 18, 2018 9:26 am
In the meantime, turn off dividend reinvestment so you don't compound the problem.
Dividend re-investment question:

Hi aristotelian, In your reply to Galaga's DAF's question you added, "turn off dividend reinvestment so you don't compound the problem...". My question: Is it the bh way to turn off dividend reinvestment in most cases, and accumulate that money for rebalancing?

My ex-manager left some bond and reit funds in my taxable account, even though there's for room for them the IRA's, so I'll clean those up eventually but I had not considered the implications of the dividend reinvestment option. For the IRA's on other hand, it seems that the impact would not apply to retirement accounts, am I correct? Thank you!
I don't think there is a "Boglehead way" when it comes to dividend reinvesting, it is a personal preference thing. One possible issue with automatic reinvesting in IRA accounts is that you can theoretically trigger wash sales without realizing it. For anyone who utilizes tax loss harvesting, I think manual reinvesting of dividends is generally the way to go.

Pigeye Brewster
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Re: Am I understanding this right about DAFs? If so...wow

Post by Pigeye Brewster » Wed Nov 21, 2018 2:21 pm

InertiaMan wrote:
Wed Nov 21, 2018 5:28 am
And do NOT have any anxiety about the mechanics of the DAF, or possibility of them not distributing to your recommended recipient. If anything, having a DAF, in my opinion, makes giving easier. Just a couple mouse clicks and its done.
100% agree with this. Once we developed our donation list, I did the bulk of our charitable giving for the year in about 10-15 minutes one morning.
InertiaMan wrote:
Wed Nov 21, 2018 5:28 am
The only issue I've run into is the minimum donation, which is $500 at Vanguard and $50 at Fidelity. I may move my DAF to Fidelity because the $500 limit is a real inhibitor to donating to smaller causes beyond my two primary recipients.
This was a concern of mine and why I selected Fidelity.

Another benefit of a DAF is it streamlines tracking your donations if you itemize. One donation receipt from the DAF to keep track of rather than a bunch of them.

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