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What are the Tax Benefits of Donor Advised Funds?

May 02, 2022

Looking for tax savvy ways to make the most of your charitable goals? A donor advised fund could be the answer. Read on.

Editor’s Note: This blog has been updated as of May 2, 2022.

Looking for ways to make the most of your philanthropic impulses? As summer approaches, you might have more time to dedicate to your charitable goals. Donor advised funds (DAFs) continue to pack a solid punch when it comes to both reducing taxes and maximizing the impact of charitable contributions. In the right situation, your charitable contributions could even help you completely offset your taxable income.

Reap Maximum Tax Benefits

The use of DAFs has surged in recent years — and with good reason: They offer donors numerous tax perks.

For example, you can claim an immediate tax deduction of up to 60% of your adjusted gross income (AGI) for cash contributions and the fair market value of appreciated assets up to 30% of AGI. If your contribution exceeds your AGI, you can carry forward the excess for five years. (Note: The CARES Act temporarily raises the limit on charitable deductions for cash contributions to public charities to 100% of AGI — but donations to DAFs don’t qualify.)

Plus, contributions of appreciated assets held for at least one year also avoid the capital gains tax you’d incur if you sold the assets and then donated the proceeds. That means you can effectively make a larger donation, with the charity receiving the amount that otherwise would go to the IRS.

If you’re not yet sure which charity you’d like to support with your DAF, you can donate to the DAF and reap the tax benefits before you designate your recipient. And, while you mull over your options, your contributions can grow tax-free. The ability to invest the funds in a DAF provides the opportunity to make larger charitable donations down the road.

The tax benefits are particularly attractive for taxpayers who’ve had a “windfall year” from, say, a bonus, the sale of a business, or a large realization event. You can reduce your taxable income with a DAF contribution and seed years of future giving.

Get the Most Bang for the Buck

So-called “bunching” and “stacking” strategies can further enhance your tax savings from your DAF contributions. Bunching has become a popular approach in the wake of the Tax Cuts and Jobs Act (TCJA). That law reduced the number of taxpayers who itemize deductions, because it doubled the standard deduction and limited (or eliminated) many previous itemized deductions. The charitable donation deduction generally is available only to people who itemize; however, for 2021 only, nonitemizers can deduct cash donations of up to $300 ($600 for married taxpayers filing jointly).

To take advantage of the charitable contribution deduction, you should consider bunching your DAF contributions. For example, if you normally contribute annually, you could accelerate 2023 contributions into December 2022 to ensure you exceed the standard deduction threshold for this year. You’ll then be able to itemize and claim the full amount as a charitable deduction.

If you anticipate being subject to higher tax rates in 2023, though, you probably should take the opposite tack: Defer your 2022 DAF contribution into 2023 so you can claim the charitable deduction then, when it will be worth more.

On the flipside, stacking refers to making contributions of different types of assets to reduce your AGI to the greatest extent possible. For example, you could contribute appreciated securities up to 30% of your AGI to your DAF, then contribute cash to your DAF to get to 60% of your AGI in total. You could then donate cash to a public charity in an amount equal to the remaining 40% of your AGI.

Act Fast

While tax season has come to a close, don’t waste any time when it comes to executing your DAF or other tax strategies. Our tax specialists can help you chart the optimal course to cut your tax liability, while also pursuing your philanthropic goals.

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