Tax and Timing Benefits of Donor Advised Funds

September 9, 2022

Timing of Donor Advised Funds

Charitable gifts through an estate

Despite the global health and financial crisis, the spirit of giving is far from fading. In fact, 2021 saw a near-record $485 billion given to charity by Americans.

This is a growing trend, considering how the current climate has forced more people to focus more on empathy in the workplace. An article by LHH on promoting caring and compassionate leadership details how we must be aware of how we tap into growing reservoirs of stress and anxiety in every interaction, due to the current mental health crisis. Companies can acknowledge this by encouraging charitable giving, which leads to satisfied employees and a healthier organizational culture.

Initiatives like these are key to the growing movement around charity in the United States. As generous as donors are, however, everyone is affected by rising inflation. Inflation is running at a much faster clip in 2022 than in 2021 and may influence other economic trends, including charity.

More committed donors may want to look towards establishing a Giving Account, where a donor-advised fund (DAF) can easily be made. In this article, we take a look at a DAF’s tax and timing benefits.

What is a DAF?

A DAF is a special kind of financial account that is made for the sole purpose of charitable investments. Here, donors can choose to give cash, stocks and even other non-publicly traded assets such as private business interests, cryptocurrency, and private company stock.

DAFs greatly differ from a direct donation to charitable organizations like checkbook giving, but are often confused for other formal planned giving vehicles, like a private foundation or charitable trust.

DAFs are within a sponsor organization, and this means that owners exercise limited control by only recommending or “advising” for approval. On the other hand, private foundations or trusts are considered legal entities. This equates to greater control, but also means that private foundations or trusts need more responsibility in accounting for transparency. Besides that, they also often require a higher establishment minimum.

Preparing for a DAF

DAFs have thus become a popular option since the 1990s because of their low cost, nationalism, and convenience. Donating in itself is easy. It can even be done at a single time, to be officially distributed to charities over the next few years or on whatever schedule is convenient.

Once the money is in the account, however, it no longer belongs to you. You can only provide directions on how the donation will be made — this can be over the telephone or online, or via a checkbook.

Plus, the process of creating a DAF can be a little tricky. Picking a charitable sponsor by assessing mutual values is only the beginning. From there, you need to consider minimum fund requirements, fund fees, community impact and support staff. For example, most commercial institutions offer lower investment fees.

If you’re new to the process, it’s especially important to consult with a financial advisor. Financial advisors can help keep track of regulations and opportunities, which allows you to create your DAF account in advance, maximize the tax deduction for the year, and stay ready to fund it at the appropriate time. That is because advisors take care to align your investments with your objectives, goals, and timeframe.

Benefits of a DAF

It was the 2017 federal income tax law that doubled the standard deduction amount. This means that few people itemize expenses on their tax returns, and they consequently receive no additional tax benefits from charitable contributions.

Donors can thus save up to $600 when making cash donations. It got even better in 2021. While deductions used to be limited from 20% to 60% of adjusted gross income (AGI), individuals can now apply an increased limit of up to 100%. This encourages donors to bundle the donations all in one year.

The tax deduction would be received immediately while the donation is secured and investment returns compound tax free over time, which increases the amount donated to charity by the end. Otherwise, DAFs can be used even in cases of disposing of assets during a large gain, rather than selling them and incurring long-term capital gains taxes.

With this brief look at DAFs and how tax-efficient donations have been made easier and more accessible for donors and charities, consider whether this vehicle is the right choice for you. For more information on this and other options, get in contact with our team and we’ll help you out.

Written exclusively for

By Monnie Jax