Maximizing Your Charitable Impact: A Guide to Donor-Advised Funds
Are you looking for a tax-efficient way to support your favorite charitable causes? Donor-advised funds (DAFs) might be the solution you’ve been searching for. In this post, we’ll explore what DAFs are, how they work, and the benefits they offer. This tool is one of our favorite for maximizing charitable impact. Especially for those who have recently sold a business or want to realize the value of a stock without paying the tax on selling it.
What are Donor-Advised Funds?
A donor-advised fund is a philanthropic vehicle that allows individuals, families, and businesses to make charitable contributions and receive immediate tax benefits. When you contribute to a DAF, you can recommend how the funds are distributed to eligible charitable organizations over time.
How Do Donor-Advised Funds Work?
1. Establishing a DAF: To get started, you’ll need to establish a DAF with a qualified sponsoring organization. These organizations, such as community foundations or financial institutions, manage the funds on your behalf.
2. Contributing to Your DAF: Once your DAF is set up, you can make tax-deductible contributions to it. You can contribute cash, appreciated securities (Rather than paying tax on selling a stock at a gain you can contribute it for it’s current value), or other assets, depending on the sponsoring organization’s guidelines.
3. Grant Recommendations: As the donor, you have the privilege of recommending how the funds in your DAF are distributed to eligible charitable organizations. You can support multiple causes, make recurring grants, or even involve your family in the decision-making process.
4. Investment and Growth: While your funds are waiting to be distributed, they can be invested for potential growth. This allows your charitable giving to have an even greater impact over time.
5. Tax Benefits: One of the key advantages of DAFs is the immediate tax benefits they offer. When you contribute to a DAF, you can generally claim an immediate tax deduction for the full fair market value of the assets donated, subject to certain limitations.
Benefits of Donor-Advised Funds
1. Simplicity and Flexibility: DAFs provide a streamlined approach to charitable giving. They eliminate the administrative burdens of managing a private foundation and offer more flexibility than direct giving.
2. Tax Efficiency: By contributing to a DAF, you can potentially reduce your taxable income in the year of the donation. Additionally, you can avoid capital gains taxes on appreciated assets donated to the fund.
3. Strategic Philanthropy: DAFs allow you to take a more strategic approach to your charitable giving. You can plan your contributions over time, align them with your values, and involve your family in the decision-making process.
4. Privacy: If you prefer to keep your charitable giving private, DAFs offer a level of anonymity. While the sponsoring organization is aware of your contributions, the recipient charities typically receive the funds without disclosing the donor’s identity.
Let’s say you invested $1,000 in Apple Stock 20 years ago. According to a recent Kiplinger article (What would $1k invested in Apple 20 years ago get you now? | Kiplinger), that $1,000 could be worth almost $530,000 today. You could sell it and pay long term capital gains tax along with Net Investment Income Tax (NIIT) and any applicable state taxes as well. Or you could donate some of your shares to fund a donor advised fund. You would be getting a massive tax deduction for the value donated subject to income limitations while in reality giving away just a fraction of your initial $1,000 investment. Not all stocks do this well and this is an extreme example however it proves the point. You can give away something that you invested a minimal amount while getting credit for its appreciated value without paying tax. Furthermore you then have a lifetime to give it away while it stays in this new vehicle growing tax free as well. If there was ever a win/win scenario we truly believe this to be it.
Donor-advised funds are a powerful tool for maximizing your charitable impact while enjoying significant tax benefits. By establishing a DAF, you can simplify your giving, strategically plan your contributions, and make a lasting difference in the causes you care about.
If you’re interested in learning more about donor-advised funds or how they can fit into your overall tax and financial strategy, don’t hesitate to reach out to our team at Wiser Tax Solutions. We’re here to help you navigate the complexities of charitable giving and optimize your tax savings.
Community Partnership with Backyard Beans
Going above and beyond really allows you to stand out. At Wiser Tax Solutions, we made a decision this tax season to sponsor a sleeve with a leader in our community. This tax season at your local Backyard Beans coffee shop has a sleeve with a custom QR code for you to win free coffee and other goodies so please go check them out to get a great brew along with food. To take the partnership to the next level, we want to encourage especially to go out on the first Monday of the month as they dedicate a portion of their sales for their “Make a difference Monday” campaign to local charities as we have made the decision to double the impact and match the giving. If they are not local to you, we don’t want you to miss out on some great roasts, so if you want to fill out a survey below, you will be entered to win some free beans delivered to your home or office.
Have a #wisertaxseason