For those interested in giving back to their communities and making a lasting impact, Donor Advised Funds (DAFs) are an excellent tool for charitable giving. They not only simplify the donation process but also provide significant tax benefits. Let’s break down what DAFs are, how they work, and why they might be right for you.
What Is a Donor Advised Fund?
A Donor Advised Fund (DAF) is a charitable account that is owned or controlled by a qualified charity. The fund allows the donor to ‘advise’ the charity on distributions from the fund. DAFs are available with sponsoring charities such as Schwab, The National Christian Foundation, and many others.
When you contribute to a DAF, you make a completed charitable gift to the sponsoring charity, which holds the money or assets you’ve donated. Said another way, a donor is eligible for a tax deduction in the year donations are made “to” a DAF.
The unique feature? You retain the ability to "advise" the sponsoring organization on how and when to distribute funds to charities of your choice over time.
Think of a DAF as a flexible giving account. You get an immediate tax benefit when you donate to it, but you can take your time deciding which specific charities will receive grants from the fund.
How Do Donor Advised Funds Work?
Make a Contribution:
You donate money, appreciated stock, or other assets to a DAF hosted by a qualified charity. This contribution is eligible for a tax deduction in the year it’s made.
Enjoy Tax Benefits:
If you donate appreciated stock instead of cash, you avoid paying capital gains taxes on the stock’s growth. This can maximize the impact of your gift while reducing your tax burden. You can read more about donating appreciated stock here: https://www.cedarstoneadvisors.com/post/donating-appreciated-stock
You receive a tax deduction for the fair market value of your donation in the year that the donation is made to the DAF.
Advise on Grants:
Once your contribution is in the DAF, you can recommend grants to qualified 501(c)(3) charities at your own pace. This means you can take your time to research causes or respond to future needs without rushing.
Grant Distributions:
When grants are made from the DAF, they are sent to the designated charities, but these distributions are not tax-deductible—you’ve already received the deduction when you initially contributed to the DAF.
Why Are Donor Advised Funds Popular?
Immediate Tax Deduction:
By donating to a DAF, you lock in a tax deduction right away, even if you haven’t yet decided which charities to support. This can be especially useful in high-income years when you’re looking to reduce your tax liability.
Simplified Record-Keeping:
Donations to charities from the DAF don’t require you to keep receipts for tax purposes. You only need to report the initial donation to the DAF on your tax return. This eliminates the headache of tracking multiple contributions throughout the year.
Flexibility in Giving:
A DAF allows you to spread your giving over months or years, enabling you to support causes at the right time while still receiving a deduction upfront.
Maximized Giving Through Appreciated Assets:
Donating appreciated stock to a DAF lets you give more without incurring capital gains taxes. For example, if your stock has significantly increased in value, donating it directly to a DAF lets the full value go toward charity, rather than reducing it by the taxes you’d pay if you sold it first.
Things to Keep in Mind
Grants Must Go to Qualified Charities:
Grants from your DAF can only be made to organizations that qualify as 501(c)(3) nonprofits.
No Additional Deductions for Grants:
Once the initial donation is made to the DAF, the grants you recommend to charities do not offer further tax deductions.
Tax Preparers Should Be Familiar with DAFs:
Some tax preparers may not be well-versed in DAFs. Ensure your tax preparer understands the proper tax treatment, such as not reporting grants from the DAF as additional charitable deductions.
Tax-Deductible Donations are Limited:
In general, most cash donations have a tax-deductible limit of 60% of your adjusted gross income (AGI). This applies to donations to DAF accounts.
Donations of appreciated stock have a tax-deductible limit of 30% of your AGI.
Start Your Giving Journey
If you’re charitably inclined, a Donor Advised Fund can be a powerful way to support the causes you care about while maximizing your tax savings. It’s a win-win solution that allows you to give thoughtfully and effectively.
Want to learn more about setting up a DAF? We would be happy to discuss this further with you and help you set up a DAF if it’s right for you.
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