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Charitable taxpayers know that contributions to IRS-recognized charities carry a tax deduction. However, this benefit can be lost if the sum of your deductions does not exceed the standard deduction. With a Donor-Advised Fund, multiple years of donations can be recognized and deducted from your taxes, without affecting the charity.
What Is a Donor-Advised Fund?
At its core, a Donor-Advised Fund is an investment account for the purpose of supporting a charitable organization. Individual taxpayers can open a DAF and contribute cash, stocks, bonds, and other assets, typically recognizing a tax deduction in the year of the contribution. The contribution is then eligible to grow tax-free using certain investment options, depending on the fund administrator. At any time, a DAF can distribute its assets as donations to charities, which receive the assets tax-free.
Generally, DAFs can contribute to a wide variety of charities, which must be IRS-qualified public charities. These entities can range from an international aid organization to your local soup kitchen. With a high degree of flexibility and tax efficiency, DAFs are the fastest growing charitable giving vehicle in the United States today.
Maximize Your Deduction
DAF contributions are not required to be level in a given year, which opens up an opportunity to take advantage of tax deductions. For example, if you are a single taxpayer making charitable contributions of $10,000 with no other deductions, you are constantly falling just short of the standard deduction of $12,950 (as of tax year 2022). If, instead, you use a DAF, you can contribute two years of donations every other year, earning a deduction of $20,000. In odd years, you can claim the full standard deduction, and in even years, you can claim the higher charitable deduction, all while contributing the same amount at different times.
To make a complex situation simple: Contribute two years of donations to a DAF every other year, taking a higher than standard deduction in those years, while cashing in on the full standard deduction in other years. By using a DAF, you can potentially save thousands of dollars in taxes every year.
Even Donations, Uneven Contributions
Because donations from a DAF and contributions to a DAF do not need to be made in the same year, charities can receive donations in years where you don’t make a contribution. This means that while you may be making twice the contribution every two years, the charity simply sees a level payment every year. This can help charities with revenue prediction and help fund projects and organizations without cash-flow turbulence.
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