Read through the blog here, or skip to our Charitable Planning With a DAF video below.
We are big fans of charitable giving as it allows you to really make a difference in the world – especially on causes you are passionate about. You can donate your time, goods, expertise, or assets like stocks or cash. When it comes to donating assets, we like to use donor-advised funds for our clients as it is often a more efficient vehicle to use for giving and potentially recognizing the tax deductions for those donations.
What Is a Donor-Advised Fund?
A donor-advised fund, or a DAF, is a type of charitable giving account to which you can donate different types of assets, ranging from real estate to stocks and cash. Because a DAF is a non-profit account, you may be eligible for tax deductions on assets donated to it during a given tax year.
How Do You Set Up a Donor-Advised Fund?
A DAF is relatively easy to set up. It’s best to talk to your financial advisor to start the process, but it essentially involves making an irrevocable donation to initially fund your DAF account. This donation can be any kind of personal asset and counts toward the balance in your DAF. Then from there, you can make ongoing donations to the DAF whenever you would like.
What Are the Benefits of a Donor-Advised Fund?
There are many reasons to establish a donor-advised fund. Not only are they easy to set up and donate assets to, but they can actually be invested if you aren’t ready to distribute funds to any charities yet.
#1: It’s Easy To Donate With a DAF
One of the benefits of donating to a DAF is its simplicity. This type of account is very easy to donate assets to. Plus, it can be connected to your investment accounts or bank account. This makes it easy to contribute assets to the donor-advised fund electronically.
#2: You Earn the Tax Deduction the Year You Donate
With a DAF, you don’t have to spend from the account in order to realize the tax deductions from your donations. The tax deductions are calculated based on what you contribute to the DAF that year, not what you spend out of the DAF. This means that you’ll have plenty of time to consider how you want to spend those funds without risking losing tax deductions in a certain year.
#3: You Can Quickly Deploy Funds in the DAF
If you have preferred charities or other non-profit organizations to which you prefer to donate, you can connect those to your DAF and easily deploy funds to them when you do want to make a donation.
#4: You Can Donate More Than Cash
If you make a donation directly to a charity, you’ll often have to make the donation in cash. With a donor-advised fund, however, you can choose to donate a variety of different assets to the account, including stocks and real estate. Those contributed assets count towards the total amount in your fund, which can then be redeployed to your preferred charities whenever you wish. For example, those with large capital gains on an individual stock that they would prefer not to recognize for tax reasons can choose to donate the stock to a DAF, potentially receiving the tax deduction and avoiding the capital gains taxes.
#5: You Can Track Your Donations
Another benefit of a DAF is that you can track all of your charitable giving in one location. You can see what assets you’ve donated to your DAF account and where you allocated the funds in your account after you’ve made donations.
#6: Your DAF Funds Can Be Invested
When you donate funds to a DAF, they can be invested while they’re held in the account. This means that you can contribute assets to the fund and then wait to donate them to charities, allowing the funds to grow first. There’s no time limit by which you have to donate the funds within your DAF. You can let them grow as much as you like before deciding to make a donation out of your account.
When Does It Make Sense To Establish a DAF?
A donor-advised fund isn’t necessarily for everyone. If you meet any of the following criteria, a DAF may be a good idea for you.
If You’re in a High Tax Bracket
If you’re in a high tax bracket and are already itemizing, a DAF might be a good idea. You can use the DAF as a tool to get some extra tax deductions and perhaps even lower your tax bracket if you’re close to the line between them.
You Have a Large, Taxable Event
If you have a large, taxable event, such as selling a large chunk of stock, real estate, or a business. Such a sale could trigger capital gains taxes and bump you up into a higher tax bracket. Donating to a DAF could offset the increase in taxes via tax deductions.
You’re Radically Generous
People who are radically generous and want to share their blessings with others by giving back whenever they can may also benefit from using a DAF. A donor-advised fund can make it easier to contribute more and keep better track of how much you’ve donated and to whom.
Sample Tax Strategies Using a DAF
Any charitable donation, whether through a DAF or not, may be eligible for a tax deduction. There are specific tax strategies that you can use with a DAF in certain situations, such as when you have a large, taxable event. If you want to employ any of the following tax strategies, it’s a good idea to speak with a tax professional to learn more.
Stacking Your Contributions
If you have recently experienced a large, taxable event, consider stacking your giving. For example, if you normally give 10% of your income to a church, you could contribute three years’ worth of your giving in one year to reduce the impact of the taxable event. The three years’ worth of funds would go into the DAF and then you could spread out the donations from the fund to the church over the course of those three years.
Donating Stock to Your DAF
If you have a large unrealized capital gain on a particular stock, then you could mitigate the taxes owed on those by donating some, or all, of the stock position to a DAF. The DAF would then sell the stock for you, essentially eliminating the capital gains tax that would normally have been triggered because the DAF wouldn’t be taxed on the sale. The proceeds from the sale would go towards the balance of your DAF, which you can then donate to the charitable organization of your choice. The added bonus: you would also potentially get to recognize a charitable tax deduction (generally up to 30% of adjusted gross income on the current market value of the stock) in the year you donate the stock.
Lowering Your Tax Bracket
If you’re teetering between two different tax brackets, you can make a donation to a DAF to lower your marginal tax bracket. This strategy can be used any time you just barely bumped up to a new marginal tax bracket. The funds donated can then be deployed later no matter when you’ve contributed them to the account.
In Conclusion: Making the Most of Your Charitable Donations
Charitable donations shouldn’t be made just for the tax deductions. But if you’re already giving, then there are ways that you can use those donations to impact your taxes and be good stewards. You can use a DAF as a tool to not just make a difference in the world but to do it wisely and improve your own financial picture at the same time. Contact your financial advisor to learn more.
For more information, watch the Charitable Giving With a DAF video below.
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