If you’re looking for ways to maximize the tax benefits of charitable giving, donor-advised funds might be a great option. Donor-advised funds are accounts that are maintained and operated by a section 501(c)(3) organization. Donors can give money or assets (stocks, bonds, real estate) to a nonprofit sponsor to then be disbursed to various charitable organizations over time. Donor advised-funds have many great tax advantages and should be considered especially in years with above-average income.
Why use a donor-advised fund (DAF)?
DAFs were initially created as a way for local community foundations to encourage charitable giving at a local level. Over time, they’ve evolved as a tool that enables donors to contribute to the organizations they care about the most, in a way that also maximizes tax benefits for charitable contributions. Donor-advised funds allow donors to contribute as little as $5,000 and benefit from a tax write-off.
Tax incentives of donor-advised funds
One great tax advantage of donor-advised funds is the ability to make a large donation in a single year when you have higher-than-average income, receive an inheritance, or are holding funds from the sale of a large asset. The donor-advised fund, used correctly, enables you to take an immediate tax deduction for a charitable donation and decrease your tax liability for that year. The funds can then be disbursed to the charities of your choice over several years.
The Tax Cuts and Jobs Act enacted in 2017 changed the threshold for itemizing deductions on your tax return, which is generally required in order to receive deductions for charitable contributions (other than special rules in response to the pandemic for 2020 and 2021). The standard deduction was essentially doubled, meaning it takes a higher threshold of itemized deductions to realize a benefit.
Annual income tax deduction limits for donations made to donor-advised funds are:
- 30% of adjusted gross income (AGI) for contributions of non-cash assets held more than one year, or
- 60% of AGI for contributions of cash
- Donations exceeding limits can be carried over for up to five tax years
Contributions of appreciated, non-cash assets provide a double benefit. The taxpayer realizes the appreciated value of the asset as a charitable contribution without paying capital gains tax on the appreciation. The asset must be held for a minimum of one year before being contributed.
Lastly, funds contributed to a Donor Advised Fund can be invested and grow tax-free over time to further maximize the charitable impact.
Think you want to set up a donor-advised fund? Choose carefully.
When choosing a donor-advised fund to contribute to, it is vital to do your research. Unfortunately, the IRS has found some DAFs to be accumulating wealth and providing economic benefits to donors, rather than distributing the funds to charitable organizations. If you need assistance in choosing the right DAF for you, we would be glad to help.
Donor-advised funds are a great way to reduce your tax liability this year, and for many years to come. Contact us if you have any questions regarding how a DAF can support your charitable giving while also offering tax benefits.