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October 18, 2023

Year-End Tax Planning: Tax Benefits for Donor Advised Funds

by Sanda Ljubovic

If you enjoy donating to charities that you support while also receiving tax benefits, a Donor Advised Fund may be a great option for you! In this post, we will explain what exactly a Donor Advised Fund is, and some of the tax benefits for Donor Advised Funds.

Tax Benefits for Donor Advised Funds

What Is a Donor Advised Fund?

A Donor Advised Fund, or DAF, is a charitable savings account that lets you donate without choosing a particular charity immediately. You may qualify for a charitable tax deduction in the year you donate but can send the money at any time to a qualified charity of your choice, all the while your account grows tax-free. There are other benefits that come with establishing a DAF as well.

Tax Benefits for Donor Advised Funds

The biggest advantage is the ability to make donations to the account and receive immediate tax benefits, while retaining power to disburse the money when most convenient to you.

A Donor Advised Fund is a good giving option if you have securities that have appreciated a lot. If you sold securities, you would have to pay capital gains taxes (15% for most tax brackets, but also as high as 20%), which would reduce your overall contribution. Contributing an appreciated asset to a DAF allows it to be sold and the money sent to charity, which in turn allows you to avoid paying capital gains tax and maximizes your charitable donations.

You should be aware, a contribution to a Donor Advised Fund is an irrevocable commitment to charity. The funds in your DAF cannot be returned or used for any purpose other than a gift to charities.

Your Fund Can Simplify Record-Keeping

The DAF will track all your contributions during the year and provide you with a single tax document. All your contributions will be consolidated into one statement regardless of how many charities the DAF pays grants to on your behalf.

The DAF will also make sure that your donations are sent to a qualified charity.

Your Money Can Grow for Good Causes

There is a wide range of investment opportunities for the charitable assets in your Donor Advised Fund. The investment earnings are credited to the DAF, giving you more to contribute to the community. While you are deciding which charities to support, your donation can grow.

You should be aware that there is an annual fee to cover the cost of administration. Also, most DAFs have a minimum initial contribution.

 

Whether or not a Donor Advised Fund makes sense for you will depend on your personal situation. Learn more about Charitable Planning here and please contact us to discuss the tax benefits for Donor Advised Funds and how making charitable giving a part of your financial plan can help support the causes you care about as well as potentially offset your tax liabilities.

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