With or without a tax write-off, many Americans want to give generously to the charities of their choice. After all, financial incentives aren’t usually the main motivation for giving. We give to support the causes we cherish. We give because we’re grateful for the good fortune we’ve enjoyed. We give because it elevates us, too. Good giving feels great – for donor and recipient alike. That said, a tax break can feel good, too, and it may help you give more than you otherwise could.
In this blog post, I want to talk to you about a charitable tool that has become popular in recent years: Donor Advised Fund (or DAF). A donor-advised fund is a giving vehicle established by a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time to any 501(c)(3) charity of their choice.
DAFs have been around since the 1930s, but they started getting more attention as a tax-planning tool under the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA law has limited or eliminated several itemized deductions, and it’s roughly doubled the standard deduction ($12,400 for single and $24,800 for married joint filers in 2020). This will make taking your standard deduction more beneficial than itemizing your deductions in many cases.
If you can “bunch” your deductible expenses in certain years, you may be able to reduce your taxes, at least in the years you have enough itemized deductions to exceed your standard deduction. For example, if you usually donate $2,500 annually to charity, you could instead donate $25,000 once each decade. Combined with other deductions, you might then be able to take a nice tax write-off that year, which may leave room for other tax-planning possibilities.
Here’s how DAFs work:
- Make a donation to a DAF. Donating to a DAF is one way to bunch your deductions for tax-smart giving. You can donate cash, stocks or non-publicly traded assets such as private business interests. We usually recommend donating highly appreciated assets so that you receive a deduction for the fair market value and avoid capital gains tax in the process. But remember, DAF contributions are irrevocable. You cannot change your mind and later reclaim the funds.
- Deduct the full amount in the year you fund the DAF. Your entire contribution is available for the maximum allowable deduction in the year you make it*. Plus, while you’re deciding which charities to support, your donation is invested and can potentially grow, which will give your initial donation more giving power over time. And any returns the investments earn are tax-free.
- Grant DAF assets to your charities of choice. You can support any IRS-qualified public charity from your donor-advised fund. You may also make grant recommendations “in honor of” or “in memory of” a loved one.
A donor-advised fund may make sense if you want to make a larger charitable donation in a calendar year, defer the payout (perhaps because you want to invest and grow the balance or because you have yet to choose the recipients), or if you want to make an in-kind donation of appreciated securities or other asset types that smaller charitable organizations are not equipped to accept. Whatever your reason may be, don’t hesitate to reach out to us if you have any questions or would like to learn more about DAFs.
*Generally speaking, if you gift long-term capital gain property, your donation is limited to 30% of your AGI. If you gift cash to a DAF, your donation is limited to 60% of your AGI. You have 5 years to carryforward any unused deduction.