With the increased standard deduction in the new tax law, fewer Americans will receive a tax deduction from their charitable contributions. This is because charitable contributions are an itemized deduction on your tax return. The new standard deduction is $12,000 for Single and $24,000 for Married Filing Jointly, so in order for it to make sense to itemize your deductions instead of taking the standard deduction, you will need enough deductions above and beyond your standard deduction threshold.
One way to maximize the amount of charitable contributions you receive a deduction for is by lumping multiple years of contributions into one tax year. This way, you raise your itemized deductions well above the standard deduction to receive the greatest deduction possible.
You can either go about this lump sum giving directly to your charity of choice, as you normally would, or into a Donor-Advised Fund, which we will talk about today.
What is a Donor-Advised Fund?
A Donor-Advised Fund (DAF) is your own personal charitable investment account. With a DAF, you remain in control of your donated cash, securities, or other donated assets, with the purpose of eventually giving to a 501(c)(3) public charity.
After you have made your contributions to the DAF, grants (distributions) may be made to the charity of your choice at any time. Donor-Advised Funds can be established at most of the major custodians - Vanguard, Fidelity, Charles Schwab, and more.
How does a Donor-Advised Fund work?
Step 1: Donate cash or securities to your DAF and receive an immediate tax deduction.
You can donate a wide variety of assets including - stocks, bonds, mutual funds, ETFs, private company stock, private equity, real estate, life insurance, and more.
We have previously talked about Gifting Appreciated Stock to charity for tax benefits.
Step 2: Manage the cash and investments in your DAF like your own personal endowment fund. The assets grow tax-free.
Professional endowments are managed to last forever. They accomplish this by investing the assets of the account to grow over time, while only spending (or giving) the growth of the portfolio and never touching the principal.
Step 3: Give to the charities you love today and in the future.
Once your contributions are in the DAF, you are free to give to charities as you choose. Some individuals choose to give the full balance of their contributions to charities in the same year, while others take advantage of the tax-free nature of the DAF and allow the assets to grow.
If you want to lump multiple years of charitable contributions into one large DAF contribution (to maximize tax deductions), you can then still give to your favorite charity in a consistent annualized manner.
In my opinion, the greatest benefit of a Donor-Advised Fund is the opportunity to create your family legacy. Utilizing a DAF as a part of your household’s charitable giving allows you to have conversations with your family members about how the proceeds of the account are distributed. After you pass away, your heirs will be well suited to continue your charitable giving legacy into the future, for as long as you’d like your DAF to exist.