Using a Donor Advised Fund to Reduce Taxable Income

WHAT’S A DONOR ADVISED FUND?

A donor advised fund (DAF) is a relatively new tool that helps both taxpayers and charities reduce taxes now while providing planned donation strategies to continue in the future. Much like a deductible IRA, assets contributed to these donor accounts produce tax savings based on specific IRS guidelines.
 
For taxpayers who itemize deductions every dollar donated to a donor advised fund reduces the donor’s taxable income dollar-for-dollar in the year of the gift. For high earners this is one of the few strategies to reduce taxable income outside employer retirement plans and benefit packages. Once in the account, the gifted assets grow tax-free until the donor decides to distribute the funds to the qualified charities they desire.
 
There’s great advantage in the flexibility a donor advised fund offers. Donors make contributions now to reduce taxes now, those donations then grow via investments tax-free and those appreciated assets are then distributed at some time in the future to a qualified charity. This is a good deal for everyone involved, except Uncle Sam. 
 
For those in the highest tax bracket, every $1,000 donated to your donor advised fund results in a Federal and SC state tax savings of ~$440.  Donating $100,000 would save that same taxpayer $44,000 in Federal & state income taxes; you can also use a DAF to avoid taxation on appreciated assets with low cost basis altogether.

GIFTING APPRECIATED STOCK TO YOUR DONOR ADVISED FUND

​To really compound the tax savings inherent with a DAF, we recommend donating appreciated stock positions from your taxable accounts. You avoid capital gains taxes, get full value of the gifted equities in the form of the tax deduction and the assets grow tax-free until distributed to a qualified charity. Be sure you only contribute shares that you have held for at least twelve months. For any shares held less than twelve months you can only deduct your cost basis.

BUNDLING CHARITABLE DONATIONS TO OFFSET INCOME WINDFALLS

​Some taxpayers may consider bundling annual contributions to their Donor Advised Fund into a single year to avoid wasted donation dollars that the newer and higher standard deductions produce.
 
For example, if you plan to give $50,000 a year for the next 10 years, and you know you have a big real estate sale, sales or performance based bonus, or generally know your taxable income will be irregularly elevated in a single tax year, you may want to bundle those annual amounts into a single, large donation that year. In this scenario, you’d donate $500,000 immediately but only distribute $50,000 each year out of the DAF while the remaining principle donations continue to grow tax-free via your investments; This strategy allows a taxpayer to continue their plan of gifting $50,000 annually while realizing a tax savings of ~$220,000 in the year of the windfall.