The Tax Advantages of Donor-Advised Funds
The Tax Advantages of Donor-Advised Funds
In 2021, a record $234 billion were held in donor-advised funds (DAFs). As one of the fastest-growing vehicles in philanthropy, you might be wondering what draws over 1.3M account holders to invest in a donor-advised fund? Much of the excitement around donor-advised funds has to do with the numerous tax advantages associated with them, specifically the ability for donors to reduce their tax liability.
What are Donor-Advised Funds?
Donor-advised funds are like a special savings account solely for the purpose of charitable giving. Individuals can make a charitable contribution to their account, receive an immediate tax deduction, and then recommend grants to 501c3 organizations over time.
What are the Tax Advantages of Donor-Advised Funds?
Immediate Tax Deduction: For donors who need to reduce their tax burden, donor-advised funds are a great option. Donors can make an immediate tax deduction when they contribute to their DAF and then recommend grants to their favorite charities over time. Especially for donors who might have a windfall situation (like receiving an inheritance or selling a business), this is a smart way to reduce your tax burden while pre-funding future years of giving.
Avoid Capital Gains Tax: Along with contributing cash, individuals can also contribute appreciated securities directly to their donor-advised fund. If a donor contributes non-cash assets like stock or crypto to their DAF, they aren't subject to capital gains tax and can receive a charitable deduction at the fair market value. This means they can pay less in taxes while also having more funds available to give to their favorite charities in a flexible way.
Tax-Free Growth: Another benefit of donor-advised funds is that the money you contribute to your DAF can be invested before it's granted out to a charity. Any growth of your investments inside the DAF is tax-free since they belong to the DAF's charitable sponsor (i.e.: Fidelity Charitable, Schwab Charitable, Charityvest). This means donors can strategically plan their charitable giving, waiting for their investments to grow before making larger gifts to their favorite causes.
Simplify Record Keeping: With donor-advised funds, the DAF charitable sponsor handles all the paperwork when sending the grants to your charities of choice. As donors make the immediate tax dedication when they contribute to their DAF, this makes it much easier to track charitable giving for tax purposes. For example - a donor could make a $500,000 contribution to their DAF and choose to grant those funds to 100 different charities. Rather than keeping track of 100 different tax receipts, they only have to keep track of the one from their DAF contribution.
Overall, donor-advised funds are a smart and efficient way for individuals to give to their favorite charities while benefiting from immediate tax benefits. It's important to note that while there are great benefits for the donors, DAF providers have been criticized for not doing enough to encourage donors to make distribution to charities (as donors get the tax deduction when they make their initial contribution - not when they grant out the funds to a nonprofit). That's why it's important to educate your supporters on the difference they can make with their DAF, make it easy to find this donation option, and give them a seamless experience with The Giving Block's solution.