Charitable Contributions Skyrocket Due to Favorable Market Conditions and Tax Changes
Charitable contributions saw a significant increase, owing to solid stock market returns and changes in tax laws. One of the most notable channels for this surge was through donor-advised funds, which experienced a dramatic rise in their inflow.
Donor-advised funds, commonly known as DAFs, are unique platforms that allow donors to make contributions in the form of cash or assets, and in return, they receive an immediate tax deduction. The real advantage of DAFs is that donors can take their time to decide where they want their gift to go. This makes DAFs an attractive option for individuals looking to donate appreciated assets without having to worry about capital gains tax. The assets remain in the DAF and can continue to appreciate until they are granted to charities.
Record Breakers in Charitable Giving
In a recent year, DAFs saw an unprecedented amount of contributions. The total amount granted to charities through these funds reached a record $9.9 billion, marking a $2.2 billion or 28% increase compared to the previous year.
The rise in giving was not only in terms of cash but also non-cash assets. A whopping 74% of the contributions were made in non-cash assets, including items like index funds, real estate, exchange-traded funds (ETFs), and even cryptocurrency.
DAFs are particularly adept at handling non-cash assets, especially those that can be challenging to liquidate. They offer an effective way for people to put these assets into a portfolio and come up with a strategic plan on how to distribute their charitable gifts at their leisure.
Changes in Tax Incentives
Changes in tax laws also played a significant role in the surge in charitable giving. A new bill limited tax incentives for itemizers, allowing them to deduct donations only if they exceed 0.5% of their adjusted gross income. This meant that a taxpayer with an income of $2 million wouldn't receive any tax benefits for their first $10,000 in annual giving.
As a result of these changes, many were advised to fund their DAFs with 3 to 5 years' worth of contributions before the tax changes took effect. Once the DAFs were sufficiently funded, donors could then spread out their donations to charities over several years.
Shift in Philanthropic Behavior
The changes in tax laws and the convenience of DAFs have started to influence donors' philanthropic behavior. Traditional ways of giving, like writing checks, are slowly being replaced by DAFs.
For instance, unlike check donations, DAFs cannot be used to buy tickets to charity events or galas, which would be partially deductible if bought directly from a charity. However, setting up a DAF and making a grant recommendation requires more effort and time than simply writing a check.
Despite the extra steps involved, many are finding the benefits of donating through DAFs outweigh the slight inconvenience. As more people start to realize this, the shift away from traditional methods of giving is expected to continue.