Tax-Savvy Charitable Giving Part 2: Donor Advised Funds

Austin Costello |

In part 1 of our tax-savvy charitable giving series we established that Americans love to give to charity. We also love to find ways to save on our taxes. 

Historically, charitable giving has been easier to “write off”, but after the tax reform in 2018, taking deductions for donations has been less beneficial.

One way to optimize your giving is to use Qualified Charitable Distributions to donate directly from an IRA. But what if you’re not old enough? After all, you have to be 70 ½ to use that strategy.

For the younger, charitably-inclined individual, a Donor Advised Fund could be the answer you’ve been looking for. 

These funds offer donors flexibility, tax benefits, and the ability to support charitable causes over time. Understanding the intricacies of Donor Advised Funds and their implications can empower individuals to maximize their charitable impact while optimizing tax advantages.

What are Donor Advised Funds?

Donor Advised Funds (DAFs) are philanthropic vehicles established by public charities to manage charitable donations on behalf of donors. Once donors contribute to a DAF, they can advise the fund on how to distribute the funds to various charitable organizations. These contributions are irrevocable but allow donors to make recommendations on where and when distributions should be made.

Tax Benefits of Donor Advised Funds

One of the primary advantages of utilizing DAFs is the immediate tax deduction upon contributing to the fund. When a donor contributes assets (such as cash, stocks, or real estate) to a Donor Advised Fund, they can claim an immediate tax deduction for the full fair market value of the assets at the time of donation, subject to certain IRS limitations.

Additionally, DAFs provide a flexible timeline for distributing funds to charities. Donors can make contributions to the DAF when it's most advantageous from a tax perspective and then advise the fund to distribute grants to charitable organizations over time, allowing for strategic philanthropy aligned with their financial circumstances.

Qualifying Criteria and Considerations

To make the most of Donor Advised Funds and their associated tax benefits, donors should keep several factors in mind:

  • Minimum Contributions: Different DAF sponsors have varying minimum contribution requirements to establish a fund.

  • Investment Growth: Contributions to a DAF can be invested, potentially increasing the overall amount available for charitable grants over time.

  • Charitable Intent: Although donors have advisory privileges, contributions to a DAF are irrevocable and must ultimately be used for charitable purposes.

  • Qualifying Charities: Grants from the Donor Advised Fund must be made to qualifying 501(c)(3) charities.

  • Qualified Charitable Distributions (QCDs) cannot be directed to a Donor Advised Fund.

  • You must itemize tax deductions to receive the deduction. 

How to Establish and Utilize a Donor Advised Fund

Setting up a Donor Advised Fund involves several steps:

  • Choose a Sponsor: Select a reputable charitable organization or financial institution that offers Donor Advised Fund services.

  • Contribute: Make a tax-deductible contribution of cash, securities, or other assets to the DAF.

  • Grant Recommendations: Advise the fund on which charitable organizations to support and the amount to distribute.

Examples of DAF use cases

Let’s take a look at a few scenarios where a Donor Advised Fund may be useful.

Close to the standard deduction

Let’s assume that you’re an individual tax filer, which would mean you have a standard deduction of $13,850 (2023). You’re a charitable person and donate $10,000 each year, but you don’t have any other deductible expenses.  

In this case, you’ll elect to choose the standard deduction, since it’s higher, which effectively gives you no benefit for your generous donations. 

Here’s where the DAF comes in. This year, you could double up and “donate” $20,000 to the donor advised fund. You don’t have to give this all away in the year that you contribute it, so you can spread it out over two years and do your normal $10k/yr donations. 

Even though you don’t distribute everything from the fund in the first year you STILL get the $20k deduction to use on your taxes. 

So, this year, you’ll take a $20k deduction on your taxes since that will be higher than the standard deduction. Then, next year, you’ll still be giving from the fund, so you can take the standard deduction ($13,850). 

This strategy gives you $33,850 in deductions over two years instead of the $27,700 that you would get with two years of standard deductions. 

Highly appreciated stock

Another reason you might use a donor advised fund is because you can donate non-cash assets. Let’s say you have 100 shares of stock that you’ve owned for 40 years. The price has grown from $10,000 when you bought it to $100,000 now. 

If you were to sell that stock and cash it in, you’d pay capital gains tax on the $90,000 gain. 

If, instead, you donated that stock to a Donor Advised Fund,  you would get a $100,000 tax deduction. You could then sell the stock in the DAF with no tax liability and distribute the cash to charities over the rest of your lifetime. 

Conclusion

Donor Advised Funds provide a tax-efficient and flexible way to engage in philanthropy. By leveraging the advantages of DAFs, donors can optimize their tax situations while supporting charitable causes aligned with their values. 

 

These funds allow for strategic giving, potential tax savings, and the ability to create a lasting philanthropic impact. However, it's advisable to consult with financial advisors or tax professionals to ensure compliance with IRS regulations and to make informed decisions when utilizing Donor Advised Funds for charitable giving. Consider exploring this avenue for tax-savvy charitable contributions and making a meaningful difference in the causes you care about.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.