How Donor-Advised Funds Can Maximize Charitable Donations & Tax Deductions

Want to make the most out of your charitable donations and maximize your tax deductions? Below are four reasons a donor-advised fund (DAF) might be your new best friend and a game-changer for your charitable giving.

But First, What Is a Donor-Advised Fund?

A donor-advised fund is like a personal charitable savings account. You add to the account, get a tax break for your contribution in the year of the transfer, and then you can grant those funds to charities whenever you like—either right away or over a number of years. Learn more about how donor-advised funds work in our complete guide.

Reason #1. Avoid Capital Gains Tax

You can donate all kinds of assets to your donor-advised fund:

• publicly listed securities
• cryptocurrency
• even privately held stock and real estate (though you may have extra legwork to value/transfer those types of assets)

Donating Appreciated Stocks

When you donate long-term appreciated assets, like stocks that have gone up in value since they were acquired, the charity receives the full market value of the holding, and you receive a tax deduction for the full market value of what was donated. Nobody is on the hook for the capital gains tax.

For example, if you bought stock over a year ago for $1,000 and it’s now worth $5,000, donating it directly to your DAF lets you bypass taxes on the $4,000 gain. You get a deduction for the full $5,000, maximizing your tax benefits while supporting your favorite causes.

Glassman Wealth Pro Tip: Have a highly appreciated, concentrated position in a single stock? Donating a portion of this stock to your donor-advised fund can be a tax-savvy way to diversify your portfolio.

Reason #2. Bunch Your Charitable Contribution Deductions

Are you expecting a business sale, large bonus, or another type of transaction that will greatly increase your income this year? Bunch your charitable deductions using a DAF and take advantage of the tax benefits donor-advised funds bring.

You can contribute multiple years’ worth of charitable giving into one year, offsetting more of your income when the tax savings are most valuable. You’ll still be able to spread out your charitable grants over subsequent years, but the tax deduction can be taken in the year of the DAF contribution.

Glassman Wealth Pro Tip: With the current $10,000 cap on state and local tax deductions, fewer taxpayers are itemizing their deductions. If you take the standard deduction instead, you don’t receive a deduction for charitable giving. By bunching multiple years’ worth of gifts into one year, it’s possible to reap the tax benefits of an itemized deduction upfront while doling out the donations in future years.

Reason #3. Plan for a Charitable Legacy

DAFs aren’t just for now—they can be useful when planning for the future, too. Upon the DAF donor’s passing, there are a few options for the remaining assets in the account.

They can be distributed to predetermined charities, and/or successor individuals can be named to carry on your charitable goals over time. This provides the opportunity for rewarding conversations with your heirs about how your family can have a lasting impact. Plus, while the assets you initially contribute to your DAF are sold, they can be reinvested (investment options may vary by custodian), allowing you and your successors to continue growing the dollars that will eventually go to charity.

Glassman Wealth Pro Tip: We’ve encouraged clients to consider naming their DAF as a beneficiary of their IRAs and other pre-tax retirement accounts as part of their charitable bequest goals. When beneficiaries inherit pre-tax retirement funds, they can face a hefty tax bill when those dollars are withdrawn. Charities and DAFs, however, can withdraw those funds without paying income tax. This means our clients’ charitable impact is preserved while their heirs can inherit other assets with less of a tax burden.

Reason #4. Easy Giving and Record-Keeping

Forget the headache of tracking donations. A donor-advised fund makes it simple: Not only are your account donations and charitable grants tracked digitally in your account, but most custodians provide an annual summary, so you can easily share your giving records with your accountant. Less paperwork, more giving!

The process of granting funds from your DAF is also a breeze. The major custodians (think Schwab, Fidelity, Vanguard) have made submitting a grant as easy as a few clicks.

DAFs Can Make Your Charitable Giving Smarter—and Less Taxing

In summary, donor-advised funds can make your charitable giving smarter and simpler, while also maximizing your tax benefits. It’s important to consult a tax professional before opening or funding a DAF to make sure it’s the right fit for your unique tax situation. Explore further by learning about Smart Charitable Contribution Strategies for Standard Deductions.

If you’re looking to boost your charitable giving, it might be time to explore a DAF with your Glassman team. To get started, please fill out this contact form.