How much to contribute to DAF this year: impact of future QCD

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Counterpoint
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How much to contribute to DAF this year: impact of future QCD

Post by Counterpoint » Fri Dec 29, 2017 11:17 am

I opened a new DAF with Vanguard yesterday using donated securities. We estimate that, together with prefunding next year’s major contributions, would fund our 501c3 contributions over the next 8 years or so (maybe somewhat longer if the DAF assets do well). The overall tax benefits according to our Turbotax simulations are very compelling (and some of the other benefits of the DAF would be good too, but probably wouldn’t have caused us to use a DAF in the absence of the tax law change).

Which raised the question as to whether we should add even more to the DAF before year-end. We will have RMDs in about 10 years, so I figured we’d move to using qualified charitable distributions (QCDs) at that point. (Our income would not change much between now and then.) Does that seem reasonable, rather than bulking up further on the DAF at this point? It would also provide more flexibility to adapt according to future tax or other changes. Finally, our main objective is to make our donations, and the tax benefits are the gravy, so I’m a bit reluctant to get too carried away in chasing the tax benefits.

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friar1610
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Re: How much to contribute to DAF this year: impact of future QCD

Post by friar1610 » Fri Dec 29, 2017 1:43 pm

Don't have a DAF and don't want one. (Vanguard's minimum is too high; I could work with Fidelity's minimum but don't want to open an account with another provider). As an alternative I did some extra year-end donations via transfer of appreciated ETF shares. The major charity agreed to treat the contribution as if it were for 2018 and 2019, so the end result is much the same as having a DAF, at least as it pertains to this 2 year period.

Earlier in 2017, before the details of the new tax law were known, I made my normal contributions using, for the first time, QCDs. Pretty straightforward and that's how I will donate going forward since I will no longer be itemizing. Tax-wise QCDs vs donating appreciated shares were very similar for me and, like you, the donations are not primarily motivated by tax considerations.

Realize you have very little time remaining to make a decision on how much more to put in your DAF in 2017, but there is a good article on the Kitces web site comparing the benefits of appreciated shares vs. QCDs that may be helpful to you.
Friar1610

Chip
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Re: How much to contribute to DAF this year: impact of future QCD

Post by Chip » Fri Dec 29, 2017 2:09 pm

I honestly think that trying to plan out past 8 years is pretty dicey. The new tax law will have sunset by then unless extended. And as you mention, you will be in sight of the QCD option.

So I'd wait if it were my money.

Personally I've funded the DAF to get us to RMDs/QCDs, but I'm closer to them than you are.

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Counterpoint
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Re: How much to contribute to DAF this year: impact of future QCD

Post by Counterpoint » Fri Dec 29, 2017 4:36 pm

@friar1610: Thanks for mentioning the Kitces article - I checked it out and it's useful to know for the future. I’ve only recently discovered the Kitces blogs and have been quite impressed.
@Chip: Good to hear your opinion, which is my gut feel as well.

inbox788
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Re: How much to contribute to DAF this year: impact of future QCD

Post by inbox788 » Fri Dec 29, 2017 5:07 pm

friar1610 wrote:
Fri Dec 29, 2017 1:43 pm
...like you, the donations are not primarily motivated by tax considerations
The way I view it is as a zero sum gain. There is a fixed amount of money you have that you have and Uncle Sam takes his share. You want to donate to a charity, and Uncle Sam graciously created programs where he's pitching in his share back to you and you can choose to keep some or give the charity more. That's the reason why we jump through some hoops to maximize the amount of donations that reach the charity.
Counterpoint wrote:
Fri Dec 29, 2017 11:17 am
Which raised the question as to whether we should add even more to the DAF before year-end. We will have RMDs in about 10 years, so I figured we’d move to using qualified charitable distributions (QCDs) at that point. (Our income would not change much between now and then.) Does that seem reasonable, rather than bulking up further on the DAF at this point? It would also provide more flexibility to adapt according to future tax or other changes. Finally, our main objective is to make our donations, and the tax benefits are the gravy, so I’m a bit reluctant to get too carried away in chasing the tax benefits.
If I understand you correctly, you're all set for 8 year or more (you can probably build in some growth in DAF) in donations, and in 10 years you will have high tax bracket QCD to donate efficiently, so there's only a gap of a few years. Donating now for the present tax write-off vs. hoping you will have an opportunity to make a donation in 5-8 years that can be tax beneficial depends on how likely you will be itemizing down the road. If it's unlikely, and you have more appreciated securities to donate now, it's a good options (bird in the hand). If you might be able to itemize and deduct most or all of the donation in say 7 or 8 years when the DAF is depleted, it's possible the appreciated stock is now worth double for double the tax benefit (two in the bush).

One more thing to consider or reconsider is whether you can or want to increase your donations, so you really don't have 8 years, and plan accordingly.

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Counterpoint
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Re: How much to contribute to DAF this year: impact of future QCD

Post by Counterpoint » Fri Dec 29, 2017 6:03 pm

letsgobobby wrote:
Fri Dec 29, 2017 4:46 pm
Agreed. I would not go further than 5-8 years out unless there were a huge tax arbitrage opportunity.
The tax benefit to us from the DAF is over 50%, including federal and state tax benefits as well as the capital gains avoided. While making the donations is paramount, improving tax-efficiency would also be good.
inbox788 wrote:
Fri Dec 29, 2017 5:07 pm

If I understand you correctly, you're all set for 8 year or more (you can probably build in some growth in DAF) in donations, and in 10 years you will have high tax bracket QCD to donate efficiently, so there's only a gap of a few years.....
Thanks for your analysis, inbox788. The major reason for my post was to confirm whether "bridging" to the QCDs is a reasonably decent strategy, and it looks like you believe this is the case. I understand that there may end up being some tax slippage (compared to increasing our DAF substantially as an alternative to the QCDs): our federal rate starting next year will be a few % points lower than in 2017 (although who knows whether it may revert back post-2025), and the QCDs will not provide the capital gains avoidance benefit.
And I'm not too concerned if there'll end up being a couple of years between the DAF expiring and the start of the QCDs. We would make our donations then whether or not we get the tax benefit.

inbox788
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Re: How much to contribute to DAF this year: impact of future QCD

Post by inbox788 » Fri Dec 29, 2017 6:58 pm

Counterpoint wrote:
Fri Dec 29, 2017 6:03 pm
The major reason for my post was to confirm whether "bridging" to the QCDs is a reasonably decent strategy, and it looks like you believe this is the case. I understand that there may end up being some tax slippage (compared to increasing our DAF substantially as an alternative to the QCDs): our federal rate starting next year will be a few % points lower than in 2017 (although who knows whether it may revert back post-2025), and the QCDs will not provide the capital gains avoidance benefit.
And I'm not too concerned if there'll end up being a couple of years between the DAF expiring and the start of the QCDs. We would make our donations then whether or not we get the tax benefit.
Yes, if you only knew your tax situation 8-10 years from now and whether the market was up or not (fair assumption it will be higher than today), and whether you were in the same or a higher tax bracket able to deduct a bigger donation down the road, then it would be clear that holding off is the better strategy, but if there's a good chance you don't get a tax benefit later, you might as well get it now while you can.

If you have even more highly appreciated securities, you have to consider the benefit of donating those and withdrawing your RMD instead of using QCDs as you're planning. It's not something I was familiar with, so I quickly looked it up and found these:

https://www.kitces.com/blog/ira-qualifi ... ecurities/
viewtopic.php?t=227027

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Re: How much to contribute to DAF this year: impact of future QCD

Post by Gill » Fri Dec 29, 2017 7:09 pm

friar1610 wrote:
Fri Dec 29, 2017 1:43 pm
Don't have a DAF and don't want one. (Vanguard's minimum is too high; I could work with Fidelity's minimum but don't want to open an account with another provider). As an alternative I did some extra year-end donations via transfer of appreciated ETF shares. The major charity agreed to treat the contribution as if it were for 2018 and 2019, so the end result is much the same as having a DAF, at least as it pertains to this 2 year period.
Tell us more about this arrangement. In other words you made an outright gift to charity in 2017 but you will be deducting part of it in 2018 and 2019? Or it just that your 2017 gift to that charity will satisfy your obligation for the next two years?
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

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Counterpoint
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Re: How much to contribute to DAF this year: impact of future QCD

Post by Counterpoint » Fri Dec 29, 2017 9:50 pm

inbox788 wrote:
Fri Dec 29, 2017 6:58 pm
If you have even more highly appreciated securities, you have to consider the benefit of donating those and withdrawing your RMD instead of using QCDs as you're planning. It's not something I was familiar with, so I quickly looked it up and found these:

https://www.kitces.com/blog/ira-qualifi ... ecurities/
viewtopic.php?t=227027
Thanks for the helpful links. 2 days ago I hadn’t heard of a DAF or a QCD, and here I am now debating the intricacies thanks to this forum and you all - bogleheads is indeed an amazing resource.

So what I thought was a decision between (1) QCDs in 10 years versus (2) adding substantially more to our DAF over the weekend with more appreciated stock, now has another competitor: (3) donating appreciated stock after the DAF runs out. I think what I’ll end up doing is to not add a lot to the DAF right now and reassess in 8 or so years after the DAF runs out. If I get ambitious over the weekend, I may add a bit to the DAF so that I increase the chances of a complete bridge over to the QCDs, even if it makes more likely an overlap between the DAF and the RMD period. Or I may just declare victory at this point - frankly I’m delighted to have discovered the DAF option in time for year-end.

(Also @letsgobobby: We are unlikely to be itemizing in the forseeable future - no deductions other than the $10K SALT plus charitable donations.)

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Re: How much to contribute to DAF this year: impact of future QCD

Post by friar1610 » Sat Dec 30, 2017 11:02 am

Gill wrote:
Fri Dec 29, 2017 7:09 pm
friar1610 wrote:
Fri Dec 29, 2017 1:43 pm
Don't have a DAF and don't want one. (Vanguard's minimum is too high; I could work with Fidelity's minimum but don't want to open an account with another provider). As an alternative I did some extra year-end donations via transfer of appreciated ETF shares. The major charity agreed to treat the contribution as if it were for 2018 and 2019, so the end result is much the same as having a DAF, at least as it pertains to this 2 year period.
Tell us more about this arrangement. In other words you made an outright gift to charity in 2017 but you will be deducting part of it in 2018 and 2019? Or it just that your 2017 gift to that charity will satisfy your obligation for the next two years?
Gill
The latter. As far as Uncle Sam is concerned, this is solely a 2017 charitable donation and I will deduct it when I do my 2017 taxes. As far as the charity (to which I had already made my 2017 donation) is concerned, this transfer will be split in two and 50% of it will be "booked" for 2018 and 2019. I have no idea (nor do I care) when they actually use the money or if they just make it part of their endowment. The benefits to me are:

- I get a final whack at deducting a charitable donation of appreciated ETF shares before the new tax law puts me in a situation where the standard deduction will be more beneficial;
- it maintains my membership in one of the charity's contributor "tiers" for the next 2 years without any further donations. These tiers are not a big deal but there are a few perks that accrue.

Since I'm an old guy, my plan for the future is to use QCDs for charitable donations. At least that avoids the taxes on the RMDs (and I would be donating to the charities anyway).
Friar1610

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Counterpoint
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Re: How much to contribute to DAF this year: impact of future QCD

Post by Counterpoint » Sat Dec 30, 2017 12:53 pm

In the comparison between QCDs and donating appreciated stock (for example in the Kitces article link above), I think the new tax situation starting 2018 would make a difference in the calculus for those who don’t itemize. Donating appreciated stock would become a little less attractive because of the higher standard deduction, whereas QCDs could still be subtracted from taxable income (and there are other benefits to the QCDs).

Also wanted to mention that we ended up taking 50% of our DAF donation (the approximate tax benefit, most of which we’ll get as a refund in April) and using it to buy back the index fund we donated. So we’ve reconstituted half of the donation with our additional cash inflow, but with a stepped up tax basis. If we want to take the mental accounting further, we could even buy back more shares of the original index fund in the same dollar amounts we disburse under the DAF annually, till we cumulatively buy back the original number of shares donated. At that point, the DAF will be operating with “free money”, and we will have our original exposure to the stock market. (And as others have mentioned, we could use the DAF at that point to increase our donations relative to what we would normally provide.) I’m not sure we’ll get around to actually buying back the latter amounts of stock, but it’s interesting to think about it in this manner - any comments on whether I’m looking at it correctly?

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Re: How much to contribute to DAF this year: impact of future QCD

Post by FIREchief » Sat Dec 30, 2017 3:22 pm

Counterpoint wrote:
Fri Dec 29, 2017 11:17 am
Which raised the question as to whether we should add even more to the DAF before year-end. We will have RMDs in about 10 years, so I figured we’d move to using qualified charitable distributions (QCDs) at that point. (Our income would not change much between now and then.) Does that seem reasonable, rather than bulking up further on the DAF at this point?
Very reasonable (I've mentioned sizing the 2017 DAF contibutions to reach QCD age in several other threads).

Also, in my case I've donated appreciated TMI shares and reinvested them 100% in TMI shares withing the DAF, so it makes no difference if the market is up, down or sideways. In fact, if the market tanks I'm better off because I have the same assets earmarked for charity (just within the DAF instead of an after-tax brokerage account), but I've saved more taxes by donating when the market was at record highs.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Counterpoint
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Re: How much to contribute to DAF this year: impact of future QCD

Post by Counterpoint » Sun Dec 31, 2017 2:41 pm

FIREchief wrote:
Sat Dec 30, 2017 3:22 pm

Very reasonable (I've mentioned sizing the 2017 DAF contibutions to reach QCD age in several other threads).

Also, in my case I've donated appreciated TMI shares and reinvested them 100% in TMI shares withing the DAF, so it makes no difference if the market is up, down or sideways. In fact, if the market tanks I'm better off because I have the same assets earmarked for charity (just within the DAF instead of an after-tax brokerage account), but I've saved more taxes by donating when the market was at record highs.
Thanks, FIREchief.

On the asset allocation, I see your point - both you and I have maintained our original exposure to TMI, just in different ways. I bought back 50% of my donation of VSTAX using my immediate tax savings, and my DAF is 50/50 Total Stock Index/Total Bond Index.

For me, one aspect that drives my DAF asset allocation is that I would make my donations irrespective of what happens to the DAF, market-wise. So in that sense it's almost like a 529 plan approaching college years, where instead of college expenses I have donation expenses. If I just had a year or two of donation expenses in the DAF, I'd have invested most it in something low-risk like MM or ST bonds. In theory if I had such a big DAF that it would run indefinitely with a SWR, it could be invested like a college endowment i.e. much higher risk. Since my DAF has a 8-10 year horizon I figured 50/50.

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