This article originally appeared in the November 2021 issue of North Carolina Lawyer Magazine. Read the complete article written by Woody Connette and view all NC Lawyer issues at ncbar.org/nc-lawyer.
Charitable donations are the lifeblood of colleges, faith communities and nonprofits. Imagine the human suffering in our communities without homeless shelters, food banks and crisis assistance nonprofits. Community symphonies and arts programs enrich us all. Land conservancy and environmental groups assure a greener world for generations to come. Lawyers know better than anyone the critical need for legal services and access to justice for those who cannot afford our fees. Indeed, philanthropy is like oxygen, and in various ways we all depend upon its life-giving properties.
Americans lead the world with the level of their charitable giving. In 2020, they gave $471 billion to charity.[i] As a group, lawyers are known for their high levels of philanthropy. Charities benefit from our largesse, and our profession benefits from our community support and engagement.
Historically, most of us have supported charities by writing checks and keeping a list of donations to claim as a tax deduction at year-end. While tax deductions have given us a financial incentive to be charitable in the past, changes in the tax code have made it more difficult for middle income taxpayers to enjoy this benefit. The 2017 code revisions nearly doubled the standard deduction. In 2021, the standard deduction is $12,550 for single filers and $25,100 for joint filers. Another big change was the imposition of a $10,000 cap on deductibility of property taxes, state and local income and sales taxes.
As a result, most taxpayers are better off claiming the standard deduction. This is especially true if you have no home mortgage interest deduction to claim. Even in the top quintile of tax filers, 79.2% used the standard deduction in 2019, up from 36.5% in 2016, based on Tax Policy Center analysis.[ii] For most of us today, claiming a charitable deduction has little or no value.
This is where a Donor Advised Fund (“DAF”) can help you. DAFs are giving vehicles established by individual donors at a community foundation (see North Carolina Community Foundations here) or another public charity. In simple terms, you create a DAF by making a charitable contribution to a foundation that holds the funds in a separately identifiable account. You then can advise the foundation on the amounts that you would like to distribute from that account to virtually any IRS-qualified public charity. The foundation administers the fund and issues checks to qualified charities in response to requests by the donor. Internally, the foundation holding your funds can invest them for tax-free growth.