Many people believe they are getting a tax benefit from their donation, but did you know that you must have itemized deductions higher than the standard deduction to be able to claim the donation as a deduction? After the Tax Cut and Jobs Act was passed in 2017, 87% of households now claim the standard deduction. If you are one of these households and you also give to charity, then you receive no federal tax deduction for your donation! This makes a Donor Advised Fund a potential option for your household.

A Donor Advised Fund, or DAF for short, is a charitable investment account, held by a 501(c)(3) organization, which is funded by a donation of cash, securities, or real estate. Making the donation generally allows the donor to take an immediate deduction (assuming they itemize). Once funded, grants may be made from the account to other charitable organizations. If invested, the funds grow tax free. A DAF can be a useful tool for taxpayers, and some scenarios highlighting their potential use are bullet pointed below:

  • Front-loading donations to reap the benefits of itemizing: Take for example a family that makes donations totaling $20k each year. The $20k alone may not be enough to begin itemizing dependent on other itemized deductions. Instead, the family can take advantage of a DAF by making 3 years of donations, or $60k, into the investment account all at once. The family will be able to continue making their yearly donations by way of grants from the DAF but will realize the tax benefit by having itemizable deductions above the current standard deduction for the year of the donations, dependent on AGI and the type of gift given (cash, securities).
  • Front-loading charitable donations to reap the tax benefits in a particular year of high income/gains: The example above also rings true for households, even if already itemizing, who have a year of high income or capital gains. The DAF can be leveraged to help offset the potential extra taxes for the year.
  • Donating Highly Appreciated Assets: Donating a highly appreciated asset allows the taxpayer to claim the Fair Market Value of the asset as a charitable deduction, as well as gifting the holding without incurring capital gains. This can be ideal over the alternative of selling the holding and donating the proceeds (dependent on Adjusted Gross Income and appreciated amount).

 

Information provided should not be relied upon for tax, legal, or accounting advice, as it is intended for informational purposes only. You should consult your own tax, legal, and accounting professionals before engaging in any transactions.