The United States is a generous country, with 69% of taxpayers contributing to charities annually, and being philanthropic offers the added benefit of a charitable deduction on tax returns, which is a valuable incentive for an otherwise selfless act.
In 2018, the standard deduction was increased. Since then, many taxpayers have accepted the standard deduction rather than itemizing their donations. However, that may not be the most lucrative route to take. A standard deduction delivers excellent tax benefits, but taxpayers should consider making contributions through donor-advised funds (DAFs) for maximum impact by taking advantage of gift-stacking.
How Do DAFs And Gift-Stacking Work?
A DAF is a charitable giving vehicle created to manage charitable donations on behalf of organizations, families, or individuals. Donor-advised funds are accounts run and maintained by 501(c)(3) charitable organizations, also known as sponsoring organizations. DAFs can also operate through a registered investment company, such as Charles Schwab and Edward Jones, which act as the sponsoring organization. Locally, the most well-known sponsoring organization for DAFs is the Stanislaus Community Foundation.
DAFs are valuable tools for donors because they can make tax-deductible donations in the current year but have the flexibility to decide how the money will be distributed to charities over time. For example, a donor wishes to contribute $30,000 to a DAF. The donor will receive the tax deduction for the current year, but the DAF may disburse the funds by donating $5,000 annually to organizations over six years.
Gift-stacking can benefit taxpayers by enabling them to take advantage of itemized deductions instead of the standard deduction. Taxpayers can exceed the standard deduction threshold by making a larger, more considerable charitable contribution in a single year rather than donating annually. This can be a beneficial strategy for many.
As tax advisors, we sometimes hear concerns about contributing to DAFs. If charities need money every year, they ask, how does making a lump-sum donation help over time? A DAF can actually give charities greater flexibility to disburse money as needed. Instead of constant reactive fundraising, the charity can plan accordingly, counting on the availability of scheduled fund donations.
How To Contribute To A DAF, Including Limitations
Donors mainly contribute cash to a DAF, but they can also donate stocks, real estate, and other assets, which are recognized as charitable contributions. By donating an appreciated asset such as a stock with a low basis, you can take advantage of the charitable donation while also avoiding tax on the appreciation if you had sold the stock instead. It’s important to note that gifts made to DAFs are irrevocable; once given, they cannot be taken back, which may be a limitation for some donors.
However, contributing to a DAF often provides donors with greater control. For instance, if a taxpayer wants to contribute to the Stanislaus Community Foundation, there’s a minimum threshold of $10,000. The taxpayer can specify whether they want those funds to be endowed or dispersed over a set period. They can also recommend which charities should receive the funds and retain this right until all donated funds have been distributed, giving the donor significant influence.
DAFs often have a minimum donation threshold and charge fees to process contributions. Taxpayers looking into DAFs should research fund fees and other fine print to avoid unexpected expenses.
Is A DAF Right For Me?
People who wish to push the itemized deduction above the standard deduction, which is $12,950 for individuals and $25,900 for married couples as of 2023, will benefit the most from a contribution to a DAF using gift-stacking. However, anyone can give to a DAF as long as they meet the minimum contribution threshold for the fund.
Some taxpayers may consider contributing to a DAF over establishing their own charitable foundations; a DAF is more convenient and does not require overhead. A DAF can also be part of an estate plan, with existing assets (for example, an IRA) rolled into a DAF.
In addition, many DAFs allow donors’ heirs to advise where funds should be distributed until the donation has been fully disbursed. Donors may also open DAFs as a way for the entire family to contribute; by making contribution decisions together, children learn the value and power of giving by being a part of the process.
Like all charitable contributions, DAF funds must be processed by December 31st of each year. As you meet with your tax advisor to review year-end planning, ask whether a DAF should be part of your overall strategy.
Get In Touch
To learn more, contact us to schedule an appointment. We are happy to explore DAFs that can help you reach your financial and charitable goals simultaneously.