Donor-advised funds, or DAFs, allow families and individuals to make tax-advantaged donations to charitable organizations by pooling donations into a fund and recommending specific charitable bequests. The IRS requires such funds to be operated by 501(c)(3) organizations, or what the IRS deems “sponsoring organizations.”1
Below we’re breaking down what you need to know regarding donor-advised funds and the potential tax advantages of utilizing one.
Donor-Advised Funds Considerations
One of the most notable differences between a DAF and other investments is that the money in a DAF may not be withdrawn. Once a donation is made, it is not returnable to the donor. This requirement, and others, set up DAFs to provide significant tax advantages.
Here are a few considerations to make when looking at the advantages of a donor-advised fund in 2021.
Tax Advantage #1: Multiple Asset Types Are Accepted
Though cash donations do provide the largest deduction, donor-advised funds allow individuals to donate multiple types of assets. Some types are even difficult to liquidate, but can still be accepted.
Acceptable asset types could include:
- Mutual Funds
- Real estate
By no means is this an exhaustive list. It does, however, demonstrate the ability for donors to be able to diversify their donations, which in turn could potentially increase their charitable giving tax deductions.
Tax Advantage #2: Investments Grow Tax-Free
Assets that are donated to a donor-advised fund are allowed to grow tax-free. In addition, you are not required to donate those funds immediately, or even the year you made the contribution. Instead, those funds may stay-in-place and continue to grow over time. This allows you to donate a larger sum to charity, while still gaining the benefit of deduction in your taxable income for the year in which the contribution to the DAF was made.
Tax Advantage #3: Eliminate Capital Gains Tax on Donated Assets
When you donate a Long Term Capital Gain asset, you typically receive a deduction for the Fair Market Value on the date of the transfer. If you are able to itemize deductions, you can use this to save on taxes. If you sell the stock and then donate, you have to pay capital gains taxes on the gain on the asset. Be sure you are able to itemize (your deductions exceed the standard deduction). For many people, we "bunch" deductions into one calendar year to take advantage of the large dollar amount to itemize on taxes. The donor advised fund allows us to donate a larger amount in one year to be doled out to favorite charities in subsequent years. Consult a tax preparer or financial advisor for details on your own individual situation.
Tax Advantage #4: Simplifies Reporting
Normally, if one were to donate to individual charities, they would need to report each charity on their taxes for the year. Contributing to a Donor Advised fund consolidates that reporting.
Donor-advised funds give individuals an opportunity to max out their charitable contributions. And in some situations, much of the tax savings and account growth that occurs is directly passed on to the charity of your choice. This makes DAFs an enticing strategy for charitable individuals and tax-minded investors.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.