This article was updated June 17, 2022.
Donor-advised funds (DAFs) are increasing in popularity because of the tax benefits of charitable giving, even with the higher standard deduction amount.
Until recently, many people would itemize deductions, including charitable gifts, allowing them to receive a deduction for their annual charitable donations. The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction for individual taxpayers. As of May 2022, this deduction is $12,950 for single filers and $25,900 for married-filing-jointly taxpayers and this increased standard deduction has prevented most taxpayers from receiving a tax deduction for their annual charitable giving.
Exploring a donor advised fund could help you improve the way you approach tax planning.
What Is a Donor-Advised Fund?
Donor-advised funds are a type of holding account for charitable gifts.
As a donor, you open and contribute to an account. The donor-advised fund itself is a qualified 501(c)(3) charity and is established by umbrella organizations.
Once the money is contributed to the donor-advised fund, it no longer belongs to you. A completed charitable gift has been made and you receive a charitable deduction in that year.
You can then advise the donor-advised fund administrator or your personal financial planner to make charitable gifts from the account. As long as the charity is a 501(c)(3), the donor-advised fund will be credited for making the gift.
What Are the Benefits of Donor-Advised Funds?
Donor-advised funds don’t have annual distribution requirements, which allow the funds to grow until you’re ready to request your charitable gifts. This allows your charitable fund to grow and potentially increase the impact of your gifting.
Additionally, the fund administrator completes all administrative filings and annual tax returns, making a donor-advised fund a very simple vehicle to use.
Donor-advised funds allow you to group several years’ worth of giving into one year. For example, if you generally give $5,000 each year to a charity that level of gifting would fall under the $12,950 standard deduction. Alternatively, you can gift three years or more into a donor-advised fund in one year.
Subsequent to the large gift to the donor-advised fund, you could then advise the fund administrator to make the usual $5,000 to a charity from the donor-advised fund each year. This allows you to maintain your desired level of annual gifting but receive at least a partial charitable deduction in the year you funded it.
Personal Financial Planning Strategy for Capital Gains
Grouping several years of giving can be a particularly strong personal financial planning strategy if you have investment positions with significant unrealized capital gains.
Personal Financial Plan Strategy Highlights
- Gift appreciated assets directly to a charity or to a donor-advised fund
- Receive a charitable deduction for the fair market value of the stock or mutual fund
- Avoid realizing the capital gains
Not-for-profit organizations don’t pay capital gains tax, so the organization can use the full proceeds from the gift for the mission.
Even if you don’t group your gifting, you can use the donor advised fund to gift appreciated securities to benefit charities that only accept cash donations. The administrator of the donor advised fund can sell the donated securities and transfer cash to charities identified by the donor. Keep in mind, all recipient organizations must all be 501(c)(3) qualified charities.
Can You Use Complex Assets in Donor-Advised Funds?
Donor-advised funds can accept complex assets, such as real estate or stock in closely held companies. Gifts of complex assets prior to a sale can have significant tax benefits and be an efficient way to realize charitable and legacy-based goals.
If the assets given to the donor-advised fund are appreciated securities, the administrator will generally want to sell them. The proceeds can be given or reinvested in a diversified portfolio if you intend to hold the funds in the account for several years or more.
Donor-Advised Fund Changes
Proposed legislation could have a material impact on how donor-advised funds work. The Accelerating Charitable Efforts Act, or the ACE Act, could impose limits on a number of features that impact charitable giving strategies.
In addition, the tax law that increased the standard deduction is scheduled to expire in 2025. Many may find themselves itemizing deductions again at that point.
We’re Here to Help
To find out more about donor-advised funds contact your Moss Adams professional. You can also visit our dedicated tax planning resources to learn more.
You can also find more insights at our Private Client Practice.