In the past, when it came to income taxes, people who were charitably inclined could make charitable gifts to reduce their taxable income. While that opportunity is still available under the new tax law, the standard deduction is now much higher ($12,200 for single and $24,400 for couples under 65 in 2019) and, as a result, fewer people are itemizing when filing their taxes; the standard deduction ends up being higher. As a result, people who are charitably inclined are advised to bunch their charitable giving – give more in one year so that they can itemize and maximize the tax benefit, and then less in subsequent years when they are not getting a tax benefit from doing so. But what if you want the tax deduction and are able to part with the funds, but you don’t want to grant such a large amount to a charity at one time? A Donor Advised Fund provides the perfect solution.
A Donor Advised Fund (DAF) is an account that is established at a public charity that acts as a charitable savings account. Here is how it works:
- The donor makes contributions (usually cash or stock, although other less liquid alternatives can be contributed as well) to the DAF and gets a tax deduction in the year the contribution is made.
- Deductions are capped at 30% of Adjusted Gross Income for stock contributions and 60% for cash contributions.
- The donor must itemize when it comes time to file taxes in order to claim the deduction.
- The donor can then recommend when and to what charities the funds should be distributed.
- Funds can be distributed immediately or over time;
- Funds can be distributed to whatever charities the donor chooses.
- While the funds are in the DAF, they grow tax-free.
Donor Advised Funds can easily be set up at most financial institutions and at many community foundations. They are extremely flexible and tax-efficient vehicles. Donors can maximize the value of a tax deduction in a year when income is high but the actual grants to charities can be made over time. DAFs can also be a great way to get family members involved with philanthropy as a DAF can have several advisors who help determine where the funds will go.
Our team of highly-trained professionals is committed to serving your best interests exclusively. For more information about Donor Advised Funds or to set up a consultation contact us today.