Using donor-advised funds is a extra superior tax technique that has gotten extra widespread not too long ago with the introduction of the Tax Cuts and Jobs Act (TCJA) in February 2020. The TCJA almost doubled the quantity of the usual deduction, which makes it much less advantageous to itemize deductions similar to charitable contributions. For individuals with plenty of charitable contributions, donor-advised funds are one choice to nonetheless get a deduction for charitable contributions.

What is a donor-advised fund?

A donor-advised fund (DAF) is a registered 501(c)(3) charitable group that accepts contributions and customarily funds different charitable organizations. While the idea of a donor-advised fund has been round for almost 100 years, they had been usually solely utilized by the ultra-wealthy. And whereas it’s true that donor-advised funds are nonetheless not going to be helpful for the overwhelming majority of individuals, latest tax regulation modifications have made their use extra prevalent.

You can arrange a donor-advised fund with most brokerages, together with Fidelity, Vanguard, and Bank of America. You can donate money, securities, or different kinds of property to the DAF. The actual listing of property eligible for donation relies on the brokerage. After you’ve gotten contributed, you may then make charitable contributions from the steadiness of your account.

You can maximize your charitable tax deductions in a single 12 months

One widespread motive that individuals arrange donor-advised funds is to maximise their charitable tax deductions in a selected tax 12 months. To present why this may be helpful, I’ll use an instance:

Our instance household recordsdata their taxes married submitting collectively and has common charitable contributions of $20,000 per 12 months. The normal deduction in 2020 for married submitting collectively is $24,800. Because their quantity of charitable deductions is lower than the usual deduction, they might not see any tax profit from their charitable contributions (relying on their quantity of different itemized deductions). In 2021 they once more plan to contribute $20,000 to charitable organizations and once more are unlikely to see any tax profit from doing so.

Now contemplate this identical household now decides to arrange a donor-advised fund in 2020. They have more money sitting round in low-interest financial savings or checking account or in a taxable funding account. So they arrange a donor-advised fund in 2020 and fund it with $40,000 in money, shares, or different property. They are eligible to take the total $40,000 as an itemized deduction, even when they solely use $20,000 to donate to the charity of their selection. Then in 2021, they’ll donate the remaining $20,000 to their most well-liked charity. They won’t be able to deduct any charitable contributions in 2021 however can as a substitute take the raised normal deduction quantity.

You could possibly deduct the total worth of shares or different investments

Another motive you may need to arrange a donor-advised fund is that you just could possibly deduct the total worth of shares or different investments. Again, I’ll use an instance to assist illustrate the purpose.

Let’s say that you’ve shares that you just bought for $20,000 that at the moment are value $50,000. Many charities, particularly smaller organizations, usually are not set as much as settle for donations of shares or different investments. So if you wish to donate that $50,000 to charity, you could have to liquidate your shares. This will imply that you’ll have to pay tax on the proceeds.

With a donor-advised fund, you may donate the shares to your fund and deduct the total honest market worth of your shares. Then the fund could make the contribution to the charity of your selection.

Donate a variety of property

Another profit to organising a donor-advised fund is the power to donate a variety of various courses of property. As we talked about earlier, many charities usually are not arrange in such a method to have the ability to settle for non-cash donations. While the precise listing of property {that a} donor-advised fund can settle for varies by the agency operating the fund, it typically will embrace extra kinds of property than a typical charity.

Why you won’t need to arrange a donor-advised fund

While there are many benefits to organising a donor-advised fund, there are some things that you just may need to be careful for.

  • It’s undoubtedly extra sophisticated than simply making charitable contributions by yourself. You could discover that the tax financial savings usually are not value the additional trouble.
  • On high of the added layer of complexity, most corporations with DAFs cost administrative charges that may reduce into your price of return.
  • You could also be restricted on the charities that you would be able to donate to. Each donor-advised fund usually could have an inventory of eligible charities. So you could discover {that a} charity that you just need to donate to just isn’t accessible.
  • You additionally lose management over the funds that you just donate – the donation to the fund is irrevocable, which means when you’ve donated to the fund you can not get the donation again. While most advisors state that they are going to donate the cash as you direct, they don’t seem to be legally required to take action.
  • The cash in a DAF is invested, so it might lose worth. That signifies that the quantity you had been hoping to donate could also be lower than you had been anticipating. You additionally usually have a restricted vary of investments accessible to your funding, and people funds additionally typically include charges.

It’s additionally necessary to remember, the annual revenue tax deduction limits for presents to donor-advised funds, are 60% of Adjusted Gross Income for contributions of money, 30% of AGI for contributions of property that might qualify for capital beneficial properties tax remedy; 50% of AGI for blended contributions of money and non-cash property.

Dan Miller (42 Posts)

Dan Miller is a contract author and founding father of, a website that helps households to journey at no cost / low cost. His house base is in Cincinnati, however he tries to journey the world as a lot as attainable together with his spouse and 6 children.