Individuals wishing to make a charitable contribution have quite a few ways to do so that can also positively impact their tax situation.
Individuals wishing to make a charitable contribution have quite a few ways to do so that can also positively impact their tax situation. The most common methods are through direct contribution, use of a private foundation, and the use of a donor-advised fund. While many individuals may understand their options if giving through direct contribution or a private foundation, a DAF isn’t as common, and may cause hesitation. However, there are a number of advantages to using a DAF if planned correctly.
A donor-advised fund, or DAF, is like a charitable investment account, for the sole purpose of supporting charitable organizations that you care about. It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. Instead of a donor contribution (where the donor writes a check or donates appreciated securities to a 501(c)(3) organization, and receives a tax deduction when the charity receives the check), or a private foundation gift (in which the donor writes a check or donates appreciated securities to a private foundation, again receiving a tax deduction when the private foundation receives the contribution), a donor-advised fund is an investment account that grows tax-free and makes charitable gifts to the organizations that you choose, while still allowing the individual to take a charitable deduction on their personal income tax return when contributions are made to the account, and not when grants are dispersed from the account to the charities. In the meantime, funds grow tax-free in the fund if grants are made to qualified charities.
A DAF allows a donor to accumulate funds in a donor-advised fund for many years without making any distributions to a qualified charity. Since the funds will earn investment income in the DAF, a larger grant will be awarded to the charity when the grant is disbursed. In contrast, a private foundation needs to expend 5 percent of its asset value annually (which may be carried over from prior years’ distributions).
The donor receives a charitable deduction in the year of contribution and may receive a tax benefit for the contribution. Under the Tax Cuts and Jobs Act of 2017, the standard deduction increased substantially from the prior law, while limiting more itemized deductions, so charitable contributions may not provide the tax benefit to the donor they once did. If the donor intends to contribute funds to charity but doesn’t want the charity to receive the funds in one year, contributions can be made to a DAF to claim a tax deduction in the year of the contribution, and the DAF can then distribute the funds to the charity when the donor is ready for the funds to be disbursed. (Please consult a financial or tax advisor to help you determine the amount of the contribution for your personal tax situation.)