Over the last five years, Darryl has given $10,000 annually to his local homeless shelter and $5,000 to his alma mater. He has a passion for helping care for the homeless and also wishes to do what he can to give back to the university he attended. He has also enjoyed the $15,000 charitable income tax deduction he has received each year. While meeting with his tax advisor regarding this year's tax situation, however, Darryl is dismayed to discover that even with his generous charitable giving, he and his wife Sue will be below the threshold for itemizing their taxes and will instead take the standard deduction for a married couple.
In an attempt to maximize his tax deduction this year, Darryl asks his advisor if there are any alternative giving methods available. Darryl is pleased to hear his advisor offer a potential solution. Instead of giving $15,000 each year to charity, Darryl can bundle five years' worth of charitable gifts into one year. He decides to use $75,000 of stock to set up a donor advised fund. Darryl takes a deduction up to 30% of his adjusted gross income for the year. Darryl deducts $45,000 this year and then carries forward the remaining $30,000 deduction to next year. During each of the next five years, Darryl directs annual distributions of $10,000 to the homeless shelter and $5,000 to the university.
Five years ago, Erin signed a binding pledge agreement with her local hospital foundation, promising to donate $5,000 each year for 10 years. Two years ago, while looking for an additional charitable deduction during a particularly successful year for her law practice, Erin donated $10,000 to a DAF. She liked that she could take an immediate deduction now and decide which charities will receive the money at a later date. Over the past several months, Erin's law practice has recently fallen on hard times, considerably tightening up her budget for the year. She would prefer to hold onto her hard-earned cash and advise the DAF to make this year's $5,000 distribution to the hospital foundation to satisfy her pledge. When Erin met with her tax professional, however, he advised her that she would face a substantial excise tax if she advised the sponsoring organization to fulfill this year's pledge amount. Rather than saving her some cash, the distribution could cost her an additional $6,250.
After doing some research, Erin's tax professional informs her that the IRS has proposed new guidance which may enable her to advise a distribution from the DAF to the hospital foundation in satisfaction of her pledge. He informs her that she can safely advise the distribution so long as the distribution is done without any reference to the existence of a pledge, she receives no additional benefits from the distribution and she does not try to claim a charitable deduction. Erin decides to move forward and contacts the sponsoring organization to initiate the process. The hospital foundation gladly receives the distribution from the DAF and credits it toward Erin's $5,000 pledge for this year. Erin has been able to accomplish her goal of fulfilling her pledge obligation and holding onto her $5,000 of savings.