As the year winds down, many taxpayers scramble to lock in charitable deductions before December 31. If you want the tax benefit of a gift now but aren’t sure exactly where the money should end up, a donor-advised fund (DAF) is worth a look.
What Is a Donor-Advised Fund?
A DAF is a charitable giving account held inside a public 501(c)(3) charity, governed by IRC Section 4966. You contribute cash or assets before year-end, claim the deduction that same year, and then recommend, on your own timeline, which charities receive grants from the account. Unlike a private foundation, a DAF has no minimum annual distribution requirement, so contributions can sit and grow for years before you decide where they go.
Why It Works for Last-Minute Giving
With the standard deduction as high as it is, many taxpayers don’t see much extra benefit from itemizing charitable gifts year to year. A DAF lets you bunch several years of giving into one contribution, take the deduction in the year it helps you most, and distribute the funds over time. The charities you support see no difference, you’re just controlling when you take the deduction.
The Tax Mechanics
- Cash contributions
- are deductible up to 60% of adjusted gross income (AGI).
- Appreciated assets
- are stocks, bonds, business interests, restricted stock, and even cryptocurrency, are deductible up to 30% of AGI. The deduction is at fair market value if the asset was held for at least one year before the donation and capital gains tax on any deferred gain in the asset at the time of donation is eliminated.
Where to Open One
DAFs are widely available through major brokerages like Fidelity, Vanguard, and Schwab. Expect an added administrative fee, typically around 0.6% annually for balances up to $500,000, on top of underlying investment fees.
One Important Limitation
A DAF cannot be used to make a qualified charitable distribution (QCD) from a retirement account. If your strategy depends on satisfying required minimum distributions directly from an IRA, a DAF won’t accomplish that.
Is a DAF Right for You?
If you want to maximize a deduction this year, hold appreciated assets you’d rather not sell outright, or just want more time to choose your charities, a DAF can be a smart, flexible option. The right move depends on your AGI, other deductions, and what you’re contributing.
If you’re weighing this before the deadline, reach out to our team and we’ll walk through the numbers with you. Call our office at (317)-588-3131 to speak with a tax professional.
