Donor Advised Funds: A Powerful Tool to Maximize Your Charitable Impact

As your financial journey progresses, you might face increased complexities like higher incomes and expanding investment portfolios. This phase often inspires thoughts of giving back to the causes you care about most. To meet these charitable and tax planning goals, many turn to a Donor Advised Fund (DAF). They have become the fastest growing charitable account because they are a powerful tool to support your philanthropic ambitions while also allowing you to maximize your tax savings.

So what is a Donor Advised Fund?

A DAF is a charitable account which you can contribute cash, securities (stocks, ETFs, Mutual Funds, etc.), or other assets. Your contributions to your DAF are tax deductible in the year you make them, and you have discretion over which 501(c) charities receive your gifts and when you want to give them. You can also choose to invest your DAF to maximize your future charitable impact. The most important thing to remember is that any money added to your Donor Advised Fund is an immediate and irrevocable gift, even if it hasn’t been distributed to the charity yet.

One of the DAFs' most powerful features is its flexibility. You are likely extremely busy and want to become more charitably inclined, but don’t have the time to research and come up with organizations that you want to write a check to in a crunch. Your fund allows you to make gifts when you are ready. Once you add money to your DAF, there is no timeline for when you need to make grants from your account to a charity. Grants from your DAF can be made to different charities and different amounts. You can even make them from a DAF provider's mobile app!

Donor Advised Funds are easy to open and fund. We can typically open and fund DAFs within a day or two, which makes this a tool that can easily be utilized for tax planning strategies up until the very last week of the year. If you plan to contribute cash, you can donate up to 60% of your adjusted gross income (AGI) to a DAF. The limits for donating appreciated securities are capped at just 30% of your AGI. Investments must be held for longer than one year or be in long-term capital gains status to be contributed. If you exceed these limits, your donations can be carried over for up to five years.

Let’s explore a couple of use cases for Donor Advised Funds.

High Income Year:

A couple may have a one-off situation at work where they receive a large bonus. In our example we’ll take a couple that each earn $200,000/year (household income of $400,000) but this year one of them received a cash bonus of $200,000 because their company had a banner year. Their “normal income” has them at the upper end of the 24% income tax bracket, but this bonus will see them pushed into the 35% tax bracket. This client typically donates sporadically to charities annually but never more than $10,000 total throughout the year. They are interested in using some of the cash they are receiving from their bonus to fund a Donor Advised Fund because it will lower their tax bill and allow them the opportunity to give to their charities of choice for many years to come.

They have decided to donate $50,000 to their DAF. They have $20,000 of other tax deductions and are interested in seeing what their tax savings would be if they did this. They would be able to itemize their deductions and see their taxable income drop $40,800. This would save them about $14,000 vs. not donating at all.

Highly Appreciate Stock:

Another way to contribute to a Donor Advised Fund is with appreciated investments. In this example, assume Beth has some stock that is worth $50,000 today but she bought it for $10,000 more than a year ago. Instead of cashing the stock out and paying capital gains taxes on this transaction, she would like to donate this to charity. Let’s examine the tax impact of her selling the stock, and then donating it versus donating it outright to her DAF.

If Beth sells her stock, she’ll need to pay $6,000 of capital gains (gains of $40,000 taxed at 15%), leaving her with only $44,000 to donate to her favorite charity. Assuming Beth is in the 24% income tax bracket she would save $4,560 on her taxes. Alternatively, if Beth donated her stock directly to her DAF, she would not have to pay capital gains taxes and she would be able to donate the full $50,000 to charity instead of only $44,000. Her tax savings would be $12,000 (assuming 24% tax bracket) and her DAF would have an additional $6,000 for her to make a meaningful charitable impact.

Bundling Contributions:

It has become more challenging to itemize deductions on your taxes with the standard deduction sitting at $29,200 for married couples and $14,600 for individuals. Unless you have a significant mortgage interest deduction, have been very charitable, or had large medical bills, the standard deduction hurdle can be challenging for many to clear. If you are charitably inclined, a Donor Advised Fund can be a tool to help your charitable gifts have a bigger impact on your taxes. Some families may elect to bundle multiple years of charitable gifts into a Donor Advised Fund to get the tax benefit in one year and then distribute those gifts over the next several years.

To better understand this strategy of bundling itemized deductions, let’s look at an example of how this might work. A couple donates $8,000 annually to charity, has $10,000 in state and local taxes, and $10,000 of deductible mortgage interest. They don’t quite get over the hurdle to itemize because $28,000 is below the $29,200 standard deduction for a married couple. Instead, they could make a contribution to their DAF of $16,000. (This would fund their charitable contributions for the next 2 years.) They could itemize their deductions in 2024 and then take the standard deduction in 2025. This move would have $6,800 of additional itemized deductions over the 2-year time period. Assuming they are in the 24% tax bracket that is a tax savings of $1,632. with no additional outlay for charity other than timing when the contributions would be made for tax purposes. The couple can still send $8,000 to their charity of choice for the DAF in 2024 and then another $8,000 in 2024. Remember, the beauty of the DAF is the flexibility of when you make the contribution to the DAF versus when you send the money from the DAF to the charity of your choosing.

We are just scratching the surface of the use of Donor Advised Funds. Individuals and families who are charitably inclined can use them as a great tax tool for reaching their philanthropic goals. If you had additional questions or want to know how to implement this strategy in your financial plan, don’t hesitate to reach out!