A donor-advised fund (DAF) is a type of investment account that allows you to donate assets — such as stocks, bonds, real estate, and cash — to eligible IRS-qualified public charities of your choice. In the world of charitable giving, DAFs are becoming a popular tool for people looking to maximize the amount of money they donate to worthy causes.
In 2022, the amount of money DAFs granted to charitable organizations reached a new high, surpassing $52.1 billion. Since 2018, the rate of growth for grants has more than doubled, increasing by 118.5%.
Tax advantages are a big draw spurring this recent increase in DAFs and a reason why you might consider opening an account. Your donations are eligible for an immediate tax deduction. You also have the potential for tax-free growth of your donated assets. Plus, under current tax laws, a “bunching contributions strategy” can help you maximize your deductions even further.
Let’s detail some of these tax and other benefits of DAFs, highlighting the importance of choosing the best funding method, particularly for federal workers.
Benefits of Donor-Advised Funds (DAFs)
As the holder of a DAF account, you’ll have flexibility in the timing of your charitable donations, and you’ll be able to select the recipients of your grants. There’s minimal paperwork to start a DAF and no startup fees. Depending on your sponsor, you may have maintenance fees and a minimum donation requirement.
Your fund’s sponsor handles the administrative work, disbursing grants to your favorite charities from your DAF assets at your recommendation. This simplifies giving by allowing you to donate to multiple charities from one centralized platform.
Even if your charitable distributions happen at a later date, you’ll receive tax benefits right away because you can take an immediate tax deduction. You can opt to begin disbursing the assets to charity, or you can let them grow tax-free.
What is the Bunching Contribution Strategy?
A bunching contribution strategy allows you (the donor) to exceed the standard deduction threshold by bunching several years of charitable contributions into a single tax year. You’ll receive the tax benefit upfront in the year you make your donation, plus you’ll provide consistent support to your charities by recommending grants from the DAF each year.
For example, in year one, you could make a large contribution to your DAF. You could then itemize deductions and receive the full charitable tax deduction for that year. Meanwhile, you could invest and grow your funds within the DAF tax-free. In years two and three, you could have your sponsor disburse charitable grants from your DAF and take the standard tax deduction for those years.
By implementing the bunching contribution strategy wisely, you could maximize both your tax benefits and charitable giving. This is especially true in 2024 when the standard deduction is quite high — $14,600 for single or married filing separately, $21,900 for head of household, and $29,200 for married filing jointly or qualifying surviving spouse.
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Why Contribute Appreciated Stock Instead of Cash?
At Serving Those Who Serve, we frequently help Feds who want to know what type of assets to include in their donor-advised fund. Depending on the Fed’s individual circumstances, we might suggest donating appreciated stock instead of cash because of the tax advantages.
That’s because if you contribute a non-cash asset (such as stock) to your DAF, you may be able to minimize or eliminate any capital gains tax by writing off the fair market value of the stock. Many Feds who have long-term investments in stocks have seen tremendous appreciation over the years. If your original cash basis (what you paid for the stock) is much less than its current fair market value, the tax savings could be substantial. Since the fair market value of stock is deductible, this could potentially provide you with a larger tax benefit than cash donations. If this strategy interests you, we recommend you work with a financial advisor who is knowledgeable in donor-advised funds to ensure you comply with IRS guidelines.
In this FedLife video, Dan Sipe, founder of Serving Those Who Serve, and Chelsea English, Associate Advisor at Serving Those Who Serve, discuss the benefits of DAFs and how appreciated assets might help you avoid capital gains taxes while maximizing the value of your charitable donations:
How the Bunching Strategy Complements Appreciated Stock Donations
By combining the bunching contributions strategy with appreciated stock donations, you can maximize your DAF’s tax benefits and charitable impact. Bunching helps you bundle several years of giving into one tax year. You’ll exceed the standard deduction for that year, and your fund will grow tax-free, potentially increasing the amount you’ll have to give away.
Donating appreciated stock may help avoid capital gains tax while providing a deduction for full market value. Ideally, you’ll want to time the use of these strategies, implementing them during high-income years or to offset major financial events.
Making the Most of Your Charitable Donations
Using appreciated stocks to fund your DAF can be a powerful, tax-efficient approach to charitable giving. However, like most financial strategies, a DAF is not a “one size fits all” approach. As a federal worker, you might want to consult with a financial advisor to tailor a strategy to your specific situation. To receive personalized assistance from our federal employee benefits experts, contact the Serving Those Who Serve team at [email protected].
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
