Are You Giving to Charities and Not Using a Donor-Advised Fund?

1. First, the donation to the fund is immediate and is a great tool to use in a tax year when you have significantly higher income, and you want a tax deduction offset. This higher income can be from securities-related capital gains, the sale of a highly appreciated business or real estate, or if your employment income is higher than normal due to a bonus or the exercise of stock options. Note that there are limitations to the tax deduction based on your Adjusted Gross Income, and it is best to first consult your financial advisor or tax preparer.

   Another strategy is to “bunch” or combine two or three years of charitable contributions in order to exceed the higher standard deduction in a given year. Although you will not likely make contributions to the DAF each year using this strategy, you can still support your favorite charities in “off” years as you have an unlimited period of time to grant out funds.

2. Secondly, for tax preparation purposes, it streamlines your recordkeeping and consolidates tax receipts all in one centralized, online location. The donation receipt from the DAF manager is the only document you need to provide to your tax preparer. You can make multiple grants to charities from the DAF, but those do not need to be tracked since the actual contribution of cash, securities, or other appreciated assets to the DAF is your sole tax deduction.

3. Another benefit is the tax-advantaged ability to donate non-cash, highly appreciated assets without paying capital gains. This can be as simple as an appreciated stock or mutual fund, or the donation can be more complex, like privately held company stock, cryptocurrency, or valuables such as art.

   As an example, say you own a stock that you previously purchased at $25/share. Today, it is worth $75/share. If you sold the share, you would potentially pay up to 20% in capital gains tax on the $50/share gain, therefore reducing the net amount that you give to a charity.  Instead, if you donate the share to your DAF, you receive the full $75 as a tax deduction and when the charity sells the share, it pays no taxes and retains $75 as a cash donation.

4. Lastly, DAFs have risen in popularity due to the lower costs and simplicity compared to forming a foundation which can require a substantial initial contribution, legal costs, and annual tax filings. A DAF can be opened with a minimal contribution and grants can be as low as $50 each. In addition, a DAF can be in the name of a family and multiple family members can be involved in the grant decisions or even be named as legacy owners once the initial DAF owners have passed away.

Overall, donor-advised funds offer abundant tax advantages, control over the account, and the ability to create a lasting legacy with your family. If you do not have a donor-advised fund and are interested in learning more, please contact your Mission Wealth Client Advisor for their assistance.