Did you know that donor-advised funds (DAFs) provide the most flexible and tax-smart way to give? And we’re offering some tips on how to use DAFs to maximize charitable giving at the end of the year.
For those who are unfamiliar, DAFs are financial accounts that allow you to make tax-deductible contributions of cash or assets, invest the money in the account tax-free and then recommend grants out of the account to your favorite charities over time. Their flexibility is valuable. In fact, they are becoming so popular that over 10% of all charitable giving now flows through them.
New DAF providers like Charityvest are making them free and easy to use as well, further encouraging their growth.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Because DAFs decouple the timing in which your charitable funds are tax-advantaged and when they must go to a specific working charity, there are more ways you can purposefully leverage the charitable funds in your DAF for impact.
In addition, the flexibility of DAFs makes it much easier to take advantage of the slickest tax strategies related to charitable giving. As we approach the end of the year and charitable giving starts to become more top of mind, here are six tips you can use to make your year-end giving maximally purposeful and tax-smart.
1. Give Appreciated Assets Instead of Cash.
If you are planning on giving to charity at the end of the year, this is the single most tax-smart move you can make. By contributing long-term appreciated assets like stock or mutual funds to your DAF, you can avoid paying capital gains taxes on the growth. The DAF then sells the asset and puts the proceeds in your DAF, and you get a tax deduction for the full market value of the asset.
You can multiply your bonus — you avoid capital gains tax and get an income tax deduction.
If you have illiquid assets such as real estate or private business interests, you can also consider giving those, or a portion of them.
DAFs are experienced in taking in assets, unlike working charities, so it's usually prudent to give assets to a DAF instead of adding complexity to charities and their teams.
2. Consider How You Can Use Your DAF's Flexibility to Be More Strategic.
It's easy to stick to the patterns of how we've funded charities in the past — fundraisers, recurring support, year-end gifts, etc.
Think "blue sky" about the kind of long-term impact you'd like to have and structure your grant timing around that as much as you feel comfortable. For example, if you want to show support to a charitable leader you believe in, perhaps monthly recurring support is right. But if you'd like to provide strategic capital for recovery after the next emerging world disaster, perhaps storing up some charitable resources in your account is particularly strategic.
3. Bunch Up Your Charitable Deductions.
By making larger, less frequent gifts to your DAF, you can itemize your deductions on your tax return in years when you have higher income or deductions from other sources. This is especially beneficial in years where you may not itemize otherwise due to the new higher standard deduction.
4. Consider Impact Investments.
Most people are reluctant to commit money to charitable purposes because of the limitations of what can be done with that capital going forward, especially with how it can continue to grow.
Many DAFs enable impact investments with capital sitting inside them. Impact investments can be equity investments in technology for good companies, real estate or public sanitation and agricultural projects. As a result, you can get excellent returns on your investment while also making a difference.
5. Consider Involving Your DAF in Your Estate Planning and Discuss Your Charitable Legacy.
Any assets you commit to a DAF are no longer a part of your legal estate and thus not subject to estate taxes. If you are charitably inclined and have a taxable estate, this can be a powerful way to minimize your estate taxes. Planning for your estate also contributes to your comprehensive legacy, which should include giving.
In addition, you can also name your DAF as a beneficiary in your will or trust. This has the same effect as making a bequest to charity, but with the added benefit that your assets can continue to grow in the DAF until they are paid out to charity.
6. Pace Your Contributions to Match Your Income.
Many people have variable income. By increasing your DAF contributions in years when your income is higher, you can minimize your overall tax responsibility.
For example, if you think you will be in a lower tax bracket this year but in a higher bracket next year, you can contribute to your DAF less this year and more next to maximize the tax savings of each marginal dollar you contribute. With a DAF, you can throttle up or throttle down your contributions to be tax-optimized while making your grants to charities smoother.
If you follow these tips on how to leverage your DAF, you can make your year-end giving maximally purposeful and tax-efficient. The more thoughtful and intentional you are about giving, the more you'll give. As giving has been shown to be addictive, before long, you just might find yourself living a more generous life.
Lastly, consider opening a DAF if you haven't already. DAFs are an excellent way to make the most of your year-end giving.
-
A Lesson From the School of Rock About the MarketsIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I retired at 65 with $7.8 million and feel like I over-saved. My 40-something son is on the same path. Should I tell him to reconsider?We ask financial experts for advice.
-
A Lesson From the School of Rock (and a Financial Adviser) as the Markets Go Around and Around
It's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
