Donor Advised Funds Tax Deduction

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What Types Of Assets Can The Daf Sponsor Accept

Donor-Advised Funds: How to Turn Charitable Giving into a Huge Tax Deduction

Some DAF sponsors can accept assets such as stock shares or real estate in kind . Others cannot.

As we described above, donating highly appreciated holdings in kind is one way to reduce your tax bill by eliminating capital gains taxes otherwise due upon sale.

If you want to employ this strategy to fund your DAF, be sure to select a sponsor who can work with you or your advisor on that.

Are There Any Rules To Owning A Donor

The IRS has specific guidelines around the kinds of organizations that are eligible to receive grants as well as the purposes these grants can serve. For example, grants can only be made to qualified charities and cannot be made to a person, or the donor cannot receive more than an incidental benefit, so it cannot be used for the admission price for an event of the gala.

Maximizing Dafs At Community Foundations

While any sponsoring organization can manage the compliance and basic functionality of donor-advised funds, community foundations provide local community expertise and connections for donors to maximize their impact.

As San Diegos only regional community foundation, we have helped passionate philanthropists create positive impacts across our county for more than 45 years. If youre interested in learning more about maximizing your impact through donor-advised funds, contact us today at 235-2300 or .

Or download the Essential Guide to Donor-Advised Funds eBook to learn more about DAFs.

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Consider Your Deductible Limits

Although much depends on your circumstances, there are limits to be aware of.

  • If you donate cash, you can deduct up to 60% of your Adjusted Gross Income .
  • If you donate long-term highly appreciated assets, you can typically deduct up to 30% of your AGI.

If you donate more than you can deduct in any given year, excess contributions can be carried forward up to five years.

To add more clarity to the AGI limitations, if your AGI is $100,000 in 2022 , you could deduct $60,000 of a cash contribution or $30,000 of long-term, highly appreciated asset.

So, if you donated $50,000 of long-term highly appreciated investments, you could deduct $30,000 in 2022 and $20,000 would carry forward to future tax years.

Assuming the same $100,000 AGI in 2023, you could fully use the remaining $20,000 of charitable deductions.

How Do Tax Deductions Work

Using Donor Advised Funds for Tax

When youre filling out your tax return, there are two ways to claim tax deductions: the standard deduction or itemizing your deductions.

The standard deduction reduces your income by an amount set by the IRS each year based on how you file your taxes . That lowers the amount of taxes you have to pay.

If you choose to itemize your deductions, you can reduce your taxes by more than the standard deduction amount. However, you will need to list all of your deductions on the Schedule A form of your tax return and save your receipts. Typically, only people who itemize their taxes can claim a charitable tax deduction.

Read Also: Federal Tax Rate On Capital Gains

The Advantages Of Donor

Donor-advised funds provide a lot of flexibility. Heres a closer look at some of the big advantages they offer:

Flexible timing: Using a donor-advised fund allows you to decouple timing decisions for donations and gifts. Donations from the fund to charities can be made over time and at your discretion. For example, say you are in your peak earning years and paying high taxes, you can donate now, take the tax deduction, and wait to make the gift to the charity until later in your life, or even at the time of your death.

Tax-deductible donations: Gifts to a donor-advised fund are irrevocable, meaning you cant change your mind and reclaim the assets after a donation is made. However, they are deductible in the tax year in which you make the gift.

Tax-free growth: Assets in a donor-advised fund can be invested and are not subject to taxes as they grow or at the time of distribution. This tax protection may make a donor-advised fund a more efficient location for assets than a taxable brokerage account, as the tax advantages can help you maximize growth and the impact of your gifts.

Estate planning: Donor-advised funds also provide a mechanism to remove assets from your taxable estate, which for some people may lower the tax cost for their beneficiaries. Upon your death, your beneficiaries can continue to direct charitable gifts from the account, or the remaining assets can be paid out to your chosen charity.

Important Considerations

A Giving Noncash Assets More Easily

In this subsection I provide more detailed explanations of how DAFs facilitate gifts of noncash assets.

What and When to Contribute to a DAF?

If a donor wishes to use a noncash asset for a gift to charity, which asset should the donor use, and when should it be given to a DAF relative to the intended date of transfer of the funds to the charity?

In most cases, the donor wishing to maximize tax savings should give the stock she owns with the highest fraction of capital gains. After the DAF contribution she can adjust her investment and DAF portfolios to restore diversification, even repurchasing the stock she contributed.

When during the tax year should she fund the DAF? If she expects her portfolio to be growing in value, she will gain the most tax savings if she makes the contribution as late as possible. For example, imagine she owns a share that is sure to go up by 10% in value. Funding the DAF with shares worth $1,000 in January and granting them to charity in December means that the charity gets $1,100 and she gets a deduction of $1,000. Had she waited until December to fund the DAF at $1,100, then everything would be the same, but now she can claim an extra $100 tax deduction.

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How Much Do I Need To Open A Daf

The minimum initial contribution to the Edward Jones Charitable Gift Fund is $10,000. As a donor, when you contribute cash or securities to a DAF, youll receive an immediate tax deduction. The assets you contribute grow tax-free.

Donors can contribute to the fund as often as they like and request that distributions be made to IRS-approved public charities of their choosing.

A Tax Policy Toward Giving Without Dafs

Reduce your taxes through SMART charitable giving? Use a Donor Advised Fund.

In US tax law, a qualified charity must gain an IRS tax classification as a 501 organization. Individual tax filers who itemize deductions can deduct their donations to 501 organizations from their taxable incomes. If one is facing a marginal tax rate on income of 35%, then a $1,000 donation will reduce a donors tax bill by $350, resulting in a net cost of $650 for each $1,000 given. Most states with income taxes also allow a deduction, further lowering the price of giving.

In addition to cash, one can also give appreciated assets, such as equities, artworks, and real estate. Imagine giving something easily valued, such as stock in a publicly traded company. If the asset were to be liquidated before giving, the owner would pay capital gains tax of as much as 23.8% on long-term gains . Thus, stocks worth $1,000 that had been purchased for $400 would first generate $143 in capital gains tax , leaving the donor with $857. Giving this net amount to charity then earns a tax deduction, which reduces income taxes by $300 . In sum, the $1,000 asset yields $857 for charity and a net tax savings of $157. However, if one gives the asset directly, then the charity gets the full $1,000, the $143 tax on capital gains is forgiven, and the full $1,000 face value of the asset can be deducted from income. Given this way, the $1,000 asset yields $1,000 for the charity, earns a tax deduction on the full $1,000 , and a swing in the donors bank account of $193 .

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High/low Tax Year Planning

To decide when and how to fund a DAF, consider your big-picture tax-planning.

When you front-load your DAF, youll use the donation to itemize deductions in the year you fund the account.

As such, it helps to make that contribution in a high-tax year, so you get the highest tax savings back from your benevolent buck.

TO ILLUSTRATE: Say youre getting ready to retire. Right now, youre in your peak income years, after which, your taxable income is likely to drop precipitously for a while. What better time to establish a DAF, to offset the high tax bracket youre currently in? Once your income is lower, you can use your DAF to keep giving, without having to dip into retirement reserves.

In this scenario, if you plan to continue giving $10,000 a year to the Capitol Land Trust , you could use a DAF to essentially claim 510 years worth of donations while youre still in a top tax bracket.

In other words, you would put $50,000$100,000 in a DAF, claim the entire tax benefit while in a peak tax year, and then distribute the money to your favorite charity at your usual $10,000 a year.

This will help you pay fewer taxes during your high-tax years. In the year you contribute to your DAF, it will also be enough to get you past the cap on itemized deductions.

Simplify Recordkeeping And Organization

With a donor-advised fund, you dont have to keep track of every gift acknowledgment from every charity you supportjust the receipts from your DAF contributions. When youre ready to support your favorite charity, you can simply log in to your account and recommend a grant to any IRS-qualified public charity.

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How Does It Work

1. Establish your DAF by making an irrevocable, tax-deductible donation to a public charity that sponsors a DAF program.

2. Advise the investment allocation of the donated assets .

3. Recommend grants to qualified public charities of your choice.

For questions about making your donor-advised-fund gift, please contact .

The Smiths Set Up A Donor

Charitable Giving Strategies to Maximize Your Deductions

Hannah and Steve bought Apple stock 10+ years ago in a taxable account. Since then, the stock has gone up in value significantly.

They learn about donor-advised funds and how they could donate some of their Apple stock without realizing capital gains tax to do so.

Since they plan to continue giving $5,000 per year for the foreseeable future, they decide to donate $40,000 worth of their highly appreciated Apple stock to a donor-advised fund in 2021.

This helps them reduce the risks related to a concentrated exposure to one company.

It also fulfills 8 years of charitable giving.

And since the Apple shares have been held longer than a year, they get an immediate $40,000 tax deduction.

This amount combined with their other itemizable deductions allows them to finally deduct their charitable giving for the first time in many years.

In the year they fund their DAF, Hannah and Steve are in the highest 37% tax bracket. This means their $40,000 deduction is expected to save them $14,800 in taxes.

And thats not even including other deductible expenses they may be able to itemize. They werent able to itemize before, so this is a big change for them.

Once the Apple shares are in the donor-advised fund, they are sold with no tax ramifications. The cost basis of those shares was $2,500, but since they were sold inside the fund, no capital gain taxes are due.

If the Smiths had sold the shares themselves, they would have incurred a taxable capital gain of $37,500 .

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Comparing Ways To Give

This table explains how to contribute to a DAF along with other details about each option.

Yes No

*The CARES Act increased this amount from 60% to 100% through 2021. In 2022, the limit you can deduct in any calendar year will revert to 60% with a five-year carry forward. These limits may be changed by law or regulation.

Additional considerations and rules:

  • The minimum grant size is $250. A DAF may not be suitable if you wish to give smaller amounts.
  • There is a delay between the time you request a grant and when it is given to a charity. Grants generally cannot be used for specific fundraising events.
  • Large gifts may reduce your tax bracket to a point where it may be more advantageous to split them between multiple years. Work with your tax professional on potential multiyear tax planning.
  • As with any strategy involving taxes, there is a potential for laws and tax rates to change, making the strategy less effective than expected.

Eliminate Capital Gains Taxes

Contributing long-term appreciated assets to a qualified charity can be a highly effective tax strategy for eliminating capital gains taxes, especially for people with investments that have increased significantly in value.

Consider a hypothetical example. Suppose you purchased $20,000 worth of stock in a company 20 years ago. Today those shares are worth $50,000, meaning a $30,000 taxable long-term capital gain. The chart compares donating the stock directly to charity versus selling the security and donating the proceeds to charity. The bottom line: By donating the stock, you eliminate a $7,140 long-term capital gain and Medicare surtax on the $30,000 increase in the stock’s value.

The more your security has appreciated and the higher your long-term capital gains tax rate, the more beneficial this strategy becomes. But you could still use this strategy to eliminate a substantial amount of tax, even if your adjusted gross income puts you at the 15% tax rate for long-term capital gains.

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C How Important Are Dafs And Daf Tax Policy

Do DAFs involve enough money for policymakers to really worry about? Perhaps surprisingly, the answer is a resounding yes. illustrates recent trends in DAFs. From 2007 to 2015, contributions to DAFs rose by 240% to a total of $22.26 billion per year. Grants from DAFs to charities rose by a similar percent, to $14.5 billion. Year-end assetsthe unspent contributionsclimbed to $78.64 billion, a 255% increase. Over the same period, the number of DAF accounts grew as well, but at a relatively slower pace of 178% to almost 270,000 accounts.

Fig. 1.

Increasing contributions to and assets held in donor-advised funds

Source: National Philanthropic Trust, Donor-Advised Fund Report, 201116.

Fig. 2.

Annual contributions and grants per DAF account, compared to average charitable deduction of all taxable returns with charitable deductions.

Source: National Philanthropic Trust, Donor-Advised Fund Report, 201116 IRS Statistics of Income reports in individual income tax returns.

Table 1.

The Size and Scope of Donor-Advised Funds from 2007 to 2015 in 1,000s of Nominal US Dollars

Average per IRS Return with Taxable Charitable Deduction:
Charitable deduction
All DAF Contributions and Grants as a Percent of total IRS Contributions:
Contributions to DAFs
4.02 3.79

National Philanthropic Trust, Donor-Advised Fund Report, 20112016 IRS Statistic of Income, Table 2.1, 20072014 and authors calculations

Fig. 3.

Support Your Legacy Planning

DONOR ADVISED FUND (TAX DEDUCTION + BUILD YOUR WEALTH)

You can incorporate your donor-advised fund into estate planning by making a bequest in your will to the DAF sponsor or by making the sponsor a beneficiary of a retirement plan, life insurance policy or charitable trust. By leaving instructions with the DAF sponsor, you can support multiple charities with one bequest. These gifts can also help reduce or eliminate the estate tax burden for your heirs.

Many sponsoring organizations also enable you to create a succession plan for your donor-advised fundallowing you to pass the remaining funds in your account on to your heirs or your favorite charities. Some programs allow you to break the fund up into multiple smaller funds to pass down to different successors. While sponsoring organizations handle succession differently, donor-advised funds can be a valuable tool for estate planning.

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Giving $100000 Of Stock To Charity With $90000 Of Long

This is an example of the difference between giving a stock to a DAF versus selling it for cash and how each affects capital gains tax and/or amount given to charity.

$82,000

1 Assumes 20% capital gains tax rate and no fluctuation in value.

  • Cutting estate taxes: Assets you contribute to a DAF are not included in your estate, so they dont count toward your total estate value. Investing in DAFs can therefore reduce the size of your taxable estate.
  • Helping with your taxes: Using a DAF may improve your recordkeeping for tax reporting purposes. Donating first to the fund and then granting to multiple charities allows for a single donation receipt. And as part of their services, the third-party administrators responsible for the day-to-day operations of a DAF will ensure the charities you support are approved by the IRS before fulfilling your grant request, making certain your donations are eligible for an income tax deduction.

A DAF has several other advantages beyond the potential tax benefits listed above:

D Why Are Dafs Predominantly Used By The Wealthy

A quick look at the tax incentives to giving can indicate why DAFs are so much more popular among extremely high-income individuals. shows the marginal income tax rates and capital gains tax rates for income brackets stated in terms of 2013 incomes, which is near the center of those years reported on below. Saving capital gains taxation, as has been shown, is perhaps the main financial reason for using a DAF. Those who have no capital gains to give, whose financial assets are tied up in IRAs or 401 savings, or who simply have AGI too low to owe any capital gains taxes, will have much weaker reasons for a DAF.

Table 2.

Federal Margin Income Tax Rate , Long-Term Capital Gains , and Net Investment Income Tax Rates, 20072015

Example of corresponding AGI brackets for 2013. MTR
For other years these are adjusted for inflation. 20072012
3.8 23.8

IRS Tax Topic 409Capital Gains and Losses and Topic 559Net Investment Income Tax.

Rates apply if taxable income exceeds $250,000 for married couples and includes net investment income, such as realized capital gains or passive business income.

This tax bracket is for married couples filing jointly. For single filers, the NIIT trigger is at $200,000.

Applies to incomes that exceed $250,000 within this bracket.

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