How to Maximize Giving and Save on Taxes with Donor Advised Funds

How to Maximize Giving and Save on Taxes with Donor Advised Funds

As you stockpile wealth, it feels rewarding to requite back. Despite the financial turbulence many people felt in 2022, this time of year is full of trappy examples of generosity and community-building efforts. In fact, Nonprofit Source reports that 30% of yearly giving occurs in December, with 10% occurring on the last three days of the year.

Giving when by donating to charities positively impacts the world and helps you leave a legacy by setting an example of generosity for future generations.

The practice moreover isn’t just “right” – it’s likely to help your financial plan. This time of year, in particular, it’s pragmatic to give when strategically to lower your taxable income and potentially reduce your tax snout come April. 

While there are many ways to give, a popular method of giving is a Donor-Advised Fund or DAF. DAFs have snowballed in recent years considering of their convenience and tax benefits. They enable you to use a wide variety of resources to support charities you superintendency about. 

Here is why DAFs are so popular, how you can maximize the benefits, and some potential drawbacks you may want to consider.

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What is a Donor-Advised Fund? | Fidelity Charitable

Donor-Advised Funds are rapidly rising in popularity. From 2019 to 2020, the National Philanthropic Trust reports there was a 20% increase in the number of DAF finance registered at national charities. As of 2020, there were 864,099 zippy accounts.

The report moreover found that over 10% of U.S. giving in 2022 was washed-up via a DAF, at nearly $50 billion dollars!

DAFs are so valuable considering you can:

  • Take an firsthand tax deduction upon donation
  • Enjoy tax-free growth, thereby amplifying the financial value of your gift
  • Use one fund to donate to multiple charities
  • Give on your own time – you decide when and to whom your donations go 

Not to mention, if you exceed the 2022 tax-deductible giving limits for a DAF (up to 60% of your adjusted gross income (AGI) when donating mazuma or 30% when donating non-cash assets), you can roll that tax deduction to the next year for up to five years. So if you requite increasingly than you’re worldly-wise to deduct from your AGI, DAFs indulge you to siphon that glut value forward to reduce your AGI and save on taxes in future years.

Most people use DAFs to requite to a soft-heartedness of their choice, whether it be an environmental cause, education, or a religious institution. As long as the soft-heartedness is a registered IRS-qualified public soft-heartedness (501c3), you should be worldly-wise to support it through your Donor-Advised Fund.

You can unshut a DAF with the help of your financial advisor. Be sure to discuss your charitable goals with your counselor superiority of time. That way, they can ensure your preferred charities are once tried by the DAF you want to use. Doing so will help you stave any unnecessary hassle.

What is a DAF, Exactly?

Think of a DAF as a charitable investment account. 

You can unshut a DAF at virtually any major investment visitor such as Fidelity Charitable, Vanguard Charitable, The National Philanthropic Trust, or Schwab Charitable. 

DAFs usually offer flexibility and indulge you to contribute various assets, including cash, investments, real estate, and sometimes plane cryptocurrency. They will usually tuition a fee for each transfer into the account. For instance, Fidelity Charitable charges $100 or 0.6% (whichever is greatest) for the first $500,000 of donations to its fund.

Even with fees, donating to DAFs can still be a financially savvy move. Many wealthy individuals use DAFs to stave the expensive financing and legal implications of establishing their own soft-heartedness or foundation.

When your money is pooled in a DAF at your financial institution, you can “recommend grants,” meaning distribute mazuma to a soft-heartedness as you choose. Nowadays, you can recommend a grant with the click of a sawed-off on your financial institution’s online account, and they will send you an email confirmation once the funding goes through. 

Here’s a visual overview from Kitces on how these finance work. 

Graphic of Donor Advised Funds

How DAFs Work 

Once you’ve opened your DAF with the help of your financial advisor, you can contribute appreciated assets, stocks, collectibles, cash, and increasingly into the account. 

The funds can sit in the worth for as long as you’d like and grow tax-free. 

DAFs are designed to unbend strategic giving, and one spanking-new strategy is “bunching” donations to DAFs. 

Say you can’t itemize your donations each year considering the standard deduction is so upper ($12,950 for individuals and $25,900 for married couples filing jointly in 2022). You can decide to frontload three years’ worth of contributions to your DAF, take the tax deduction, then spread the grants out over the set period. 

You’re still giving at the same cadence, just taking wholesomeness of the tax benefits.

Another spanking-new using for DAFs is creating a family tradition of giving. Let each member of the family research and recommend a set value of donations every year, and get your family involved in giving intentionally on a regular basis.

Whatever money you donate during a given year is tax deductible, so if you have the means, be sure to donate to the limit of your personal yearly deduction.

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Key Benefits DAFs Bring To Your Giving Efforts

Arguably the most significant goody of DAFs is the firsthand tax unravel upon contribution. 

Let’s say you receive a large inheritance or strong market returns. Putting a considerable sum of that money into a DAF can help you stave a significant tax undersong while sponsoring your giving for decades to come. You can plane donate long-term appreciated resources to a DAF instead of liquidating them, which can help you manage your wanted gains liabilities.

However, remember that you’ll only realize the full tax benefits if you itemize the donations on your return. 

Before you donate, alimony in mind that donations are irrevocable, meaning you can’t withdraw money from a DAF once you place it in the fund. The only way to move that money is into a registered soft-heartedness of your choice.

Besides the tax benefits, DAFs moreover indulge for flexible giving.

You can hands tenancy the undulation of your gifts, giving as often or infrequently as you like. This could promote year-round giving or giving on special occasions. You could plane make it a family tradition to requite together monthly, or perhaps on unrepealable holidays.

However you decide to give, DAFs help you maximize the value of your gift. As your resources can grow tax-free, you can ultimately requite increasingly to the charities you wish to support.

Finally, DAFs are an incredible tool for legacy planning: 

  • What causes do you superintendency the most about?
  • What are your values as a family?
  • Where do you and your family volunteer? 
  • Are there charities you wish to protract supporting without your passing?

You can make a single throwback in your will to instruct the DAF sponsor to requite to one or multiple charities upon your passing. With this option, you can moreover specify how much and how often money should be donated.

Drawbacks to Consider Before Opening an Account

While DAFs can slide giving for many families, they aren’t right for everyone. Here are some downsides to using DAFs when facilitating charitable giving efforts. 

First and foremost, many DAFs have upper minimum worth balances (often upwards of $5,000 to $10,000). 

This ways that your worth wastefulness can’t fall unelevated that number without a fee. Such a significant value could prohibit families from making the donations they’d like to or having unbearable funds to maintain the worth long-term. 

Generally, DAFs are relatively simple to operate, but sometimes they can be expensive to set up and maintain. Considering of this, make sure you are crystal well-spoken on any legalistic and ongoing worth fees that could stupefy your giving.

Another important consideration is the permanence of the donations. Once you put an windfall into a DAF, you cannot take it out. If you’re in a financial crunch, this can put you in an unfortunate position. 

To stave any conflicts, talk to your financial counselor well-nigh how much to contribute to your DAF, ways you can diversify your portfolio, and how much you should save in your emergency fund.

Overall, there’s far increasingly to like well-nigh DAFs than drawbacks, but it’s still prudent to speak with your financial counselor well-nigh what DAF they recommend. 

Finish the Year on a Good Financial Note

The holidays can be a rented time, but it’s moreover a time for getting your house in order, reflecting on the past year, and making positive changes to start the next year off right. 

One of the weightier things you can do for yourself is to ensure you are using the right tools at your disposal to maximize your giving while saving on taxes. Without all, it pays to be enlightened of sound financial moves that save you money.

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