The Tax Benefits of a Donor-Advised Fund

In a year characterized by a global pandemic, social unrest, an economic downturn, and severe job losses, there was one big, unexpected positive in 2020: charitable giving surged.

Kiplinger reported that in a survey from early in 2020, as the pandemic was spreading and political uncertainty was high, about 40% of Americans still cited that they would likely give to charity. Americans wanted to help their neighbors, who may have been harder hit by the pandemic.

As a result, 2020 was a record year for charitable giving. More than $2.45 billion was donated in 2020, representing a 25% increase over the $1.97 billion given in 2019.[1]

Interestingly, many Americans turned to donor-advised funds (DAF) to make their donations last year. If you're unfamiliar with donor-advised funds, let's take a moment to discuss what these funds are and why they may be an excellent option for you, given their tax benefits.

You can think of a DAF as your own personal charitable giving savings account. The difference between a DAF and a savings account is that you can hold several different assets, including cash, mutual fund shares, stocks, and cryptocurrencies. These assets are held in the DAF until you're ready to transfer the funds or stocks directly to the charity of your choosing. And you can stagger your gifts throughout the year, maximizing the impact of your gift.

DAFs have grown in popularity recently, as they have several tax advantages.

As soon as you add funds to your DAF, you're immediately eligible for a tax deduction. Now, I know what you're thinking; you're also eligible for a tax deduction when you give cash to charitable organizations like food banks, homeless shelters, disaster relief charities, and the like. But with a DAF, you'll receive a deduction as soon as you contribute to your DAF, even before the funds are distributed to your select charities.

Plus, with a DAF, you may also be eligible for several other tax benefits.

First, whether you give cash via a check or wire transfer, you'll receive a tax deduction of up to 60% of your adjusted gross income (AGI). The deduction for securities and other appreciated assets is up to 30% of your AGI. And you'll also be eligible for a five-year carryforward for any unused deductions.

Second, you won't need to pay capital gains tax on appreciated long-term assets like securities or real estate. It's important to note that you need to hold the asset(s) for at least a year for you to be eligible for the capital gains tax elimination.

Third, along these same lines, there's no estate tax associated with a DAF.

Fourth, if you chose an investment strategy for your DAF, your assets could grow tax-free. Also, as your account grows, you'll have even more funds to donate to charities.

And finally, if you're subject to an alternative minimum tax (AMT), your donation could limit your AMT impact.

There are undoubtedly several tax benefits to supporting your favorite charitable organizations through a DAF, and we'll likely see more individuals utilize these funds in 2021.

The reality is that all of the COVID-19 relief spending from 2020—and what's on tap for this year—will eventually need to be paid for in one way or another. The most likely path will be increased individual taxes, especially when you consider the Biden administration already signaled it would raise taxes soon. So, if you set up a DAF now, you're immediately eligible for a tax deduction this year, even before the funds are distributed to charities and before there are any changes to the current tax law.

If you would like to learn more about how you can give to your favorite charitable organizations and support other social causes important to you through a DAF, please don't hesitate to reach out to us today. We'd be happy to discuss the tax benefits and if it's the right option for you.

Please click here for important disclosures.

[1] https://www.kiplinger.com/personal-finance/601981/4-charitable-giving-tips-for-uncertain-times