With a DAF, more of your money goes to charity and less to taxes.
Though charitable giving has long been understood as a path to tax savings, the tax benefits that are available through a donor advised fund can be even more significant than those provided by many other philanthropic options.
You can deduct a higher percentage of your gift, and more types of gifts are tax deductible.
Immediate deductibility
One of the great advantages of contributing to a donor advised fund is that it allows you some breathing space between giving for tax purposes and choosing where your actual gifts will go. You can give a lump sum to your DAF and take the full tax deduction for that year. The money stays in the fund where it accumulates tax-free investment earnings, until you decide where to recommend a grant.
Gift dates for tax purposes vary slightly with the type of gift. The gift date for cash is the post-marked date when you mail a check, or the date a cash gift is wired. For appreciated securities, as well as for more illiquid assets such as privately held stock and real estate, the date is the day that the contribution is transferred into the parent charity’s name.
Giving you even greater flexibility are carry forward deductions, which allow you to take advantage of any tax deductible amounts that exceed the year’s adjusted gross income limitation. You can take an allowable deduction for five additional years after the year of your original contribution.
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Tax-deductibility specifics
Cash. The deduction is based on the cash amount given. Your allowed deduction is up to 50% of AGI in the tax year you put the money in your DAF.
| Tax-deductibility limits | |
|---|---|
| Cash | Up to 50% of AGI in the tax year the gift is given to the DAF |
| Appreciated long-term securities | Up to 30% of AGI in the tax year the gift is given to the DAF |
| Short-term securities | Up to 50% of AGI in the tax year the gift is given to the DAF |
Long-term securities. For publicly traded stocks that you have held for more than one year, the deduction is based upon the mean value of the securities. That’s the average of the high and low prices on the gift date. Your allowed deduction is up to 30% of AGI.
Short-term securities. For publicly traded stocks and bonds that you have held for one year or less, the deduction is based on either your cost basis or fair market value, whichever is less. Your allowed deduction is up to 50% of AGI.
Cross these taxes off your list
Estate taxes. All contributions to your DAF are considered to be outside your estate, and are thus exempt from estate tax and probate. There may also be relief from gift tax.
Capital gains. No capital gains are applicable for appreciated securities contributed to the account.
Excise taxes. Unlike private foundations, donor advised funds are exempt from paying excise taxes on investment income.
Account income
Any income from investment growth, dividends, or capital gains on the investments in your DAF are exempt from taxes, but are not tax deductible.
Let the charity liquidate
Giving appreciated securities directly to your parent charity, instead of liquidating them and donating the proceeds, can be better both for you and for the charity. That’s because if you give the securities instead of selling them, you avoid paying any capital gains tax. That can mean a substantial reduction in your income tax. And it means the charity receives a larger gift. If your assets have depreciated, though, you may want to sell them and add the proceeds to your DAF to take advantage of the capital loss.
Liquidate securities and give proceeds vs give securities directly to parent charity
Donating appreciated securities can mean more goes to the charity, at less cost to you.
| Sell securities and donate proceeds to your donor advised fund | Donate securities directly to your donor advised fund | |
|---|---|---|
| Current value of securities | $100,000 ($50,000 cost basis) |
$100,000 ($50,000 cost basis) |
| Capital gains tax you pay (15% of $50,000) | $7,500 | $0 |
| Amount that goes to your fund | $92,500 | $100,000 |
| Your income tax savings (35% marginal rate | $32,375 | $35,000 |
| Cost to you of the donation | $67,625 | $65,000 |
Donor advised funds are a great way to benefit the causes that you care about while taking your own tax situation into account. The less money that goes to taxes, the more that goes towards helping the causes that you have chosen to support.
In conclusion
In some cases, such as the gifting of tax-deferred retirement plan benefits, you may be better off giving the money to your donor advised fund than leaving it to your estate or heirs. Assets held in IRAs, 401(k) or 403(b) plans, and Keogh plans may push the value of your estate above the tax-exempt limit. Estate taxes are always figured at a higher rate than the highest income tax rate. In addition, your heirs may pay income tax on any distributions they receive from these accounts. Together these taxes could add up to more than 75% of the inherited assets. But if your donor advised fund accepts gifts of these plans, very little will go to taxes — almost all of it will go to charity.
Donor-advised Fund Taxes: Issues and Implications by Inna Rosputnia
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