There are countless ways to give—from dropping off your old couch at local donation center to volunteering at the local soup kitchen. When it comes to monetary gifts, it’s worth thinking through how to give in a way that both supports your values and helps maximize tax savings.
One of the most effective tools for donating in a tax-efficient way is a donor-advised fund (DAF). Let’s walk through how a DAF works, how strategies like “bunching” can help, and things to keep in mind if you’re considering this strategy.
Donor-Advised Funds: Your Philanthropic Hub
A donor-advised fund allows you to time your tax deduction when it’s most beneficial for you while distributing those funds to charities when you’re ready. The DAF is sponsored by a 501(c)3 organization that invests the donations and manages the account.
In practice, it looks like this:
- You contribute to the DAF today (and take the deduction on this year’s tax return).
- The funds can grow tax-free inside the DAF, managed by the sponsor.
- Over time, you recommend grants to your preferred charities, and the sponsor makes distribution decisions based on those recommendations.
Because your gift to the DAF is irrevocable, you can’t pull it back out of the fund. But that also helps cement the tax deduction now while providing flexibility later.
Leveraging High-Income Years & “Bunching”
Two approaches to DAFs can make them effective tax strategies: gifting during a higher-income year and bunching (or bundling) your donations.
Bumper-Crop Years
If you have a year with significantly higher income—maybe due to a business sale, real estate transaction, or bonus—you can combine your planned future charitable giving into that year (via a DAF) to help absorb some of the tax impact.
For example, perhaps you know you will make a monthly donation to your local homeless shelter, and you know roughly what it’s going to be. You could put two years’ worth of donations into a DAF during the bumper-crop year, take the tax break, and then distribute the money month-by-month just as you would have anyway.
This could help reduce your tax footprint for your high-earning year. And because your marginal tax rate may be higher in that year, the deduction is more valuable.
Bunching/Bundling Your Donations
Following the Tax Cuts and Jobs Act of 2017, the standard deduction increased, making itemization harder unless your deductions are substantial. Because of this, many tax payers are opting not to itemize. To unlock the benefit of itemized charitable deductions, you might:
- “Bunch” two to three years’ worth of intended charitable donations into one calendar year.
- Make that contribution to a DAF.
- In subsequent years, support charities from that fund.
By doing this, you may exceed the standard deduction in the “bundle” year and gain tax benefits while preserving your philanthropic rhythm over time. But keep in mind that the standard deduction, the AGI limitation on deductibility, and the treatment of charitable deductions are subject to change. Always check for your specific tax year.
What Should You Keep in Mind with a DAF?
Using this type of fund to support your favorite causes is an attractive prospect, but you should keep these things in mind:
- No double-dipping. While you receive a tax deduction at the time of the original donation to the DAF, you cannot deduct the amount again when the money is distributed to a charity.
- Your gift is irrevocable. Once you put money into a DAF, you can’t get it back.
- Understanding your role. “Advised” is the keyword here. As a donor, you have advisory privileges, so you can speak your preference on what happens with your donation, but the sponsor has the final say in how the funds are distributed.
- Watch for evolving regulation and state tax rules. Lawmakers occasionally propose changes to DAFs. Your state may also have its own deduction ceilings or rules for charitable giving. It’s advised to consult with a professional.
Involving Your Family
As wealth accumulates, so too does the need to discuss important financial decisions as a family. Your family’s philanthropic endeavors should be included in those discussions, including the importance and joy of giving.
A donor-advised fund is one of many ways to reinforce these ideals. Perhaps you value education highly, so you set aside funds in the DAF to support the family alma mater. Or maybe the hospital system that has served your family through generations, and you use the DAF to donate there. DAFs are also commonly connected to religious institutions.
Family is an important factor in the giving process, and no matter how your family chooses to give, a DAF could help you do so in the most efficient way possible—both for your family and the nonprofit organization.
Leaving a Legacy Through Intentional Giving
Giving back is one of the most rewarding parts of financial success. It’s not just about writing a check; it’s about creating impact in ways that reflect your values and strengthen your legacy. With a little planning, you can support the causes that matter most to you while also making the most of the available tax benefits.
Whether you’re using a donor-advised fund or exploring other charitable strategies, we can help you make charitable giving part of your financial plan in a way that makes sense for you. Reach out to your financial advisor or contact us today.
Scott Berryman is a non-registered associate of Cetera Wealth Services, LLC.
This content is for general information only and is not intended to provide specific legal, tax, or other professional advice.
Investing involves risk, including possible loss of principal. No strategy assures success or protects against loss. To determine what may be appropriate for you, consult with your attorney, accountant, financial or tax advisor.
Generally, a donor-advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.
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