5 Tax Benefits of Donor Advised Funds
A donor-advised fund (DAF) is a charitable giving vehicle administered by a public charity created to manage charitable donations on behalf of organizations, families, or individuals. The benefits of DAFs extend beyond their primary purpose of facilitating philanthropic activities. One of the main incentives of DAFs is the tax benefits donors receive from giving. Donors can bolster their philanthropic impact by understanding and leveraging these tax advantages:
1. Immediate Charitable Tax Deductions- One tax benefit of DAFs is the immediate charitable tax deduction. When a contribution is made to a DAF, the donor receives an immediate tax deduction in that tax year. The donor can immediately benefit from the tax deduction before the funds are granted to specific charities.
The tax deductions apply to multiple contributions: cash, privately held stock, real estate, and other appreciated assets. However, the IRS limits the deductible amount based on the donor’s adjusted gross income (AGI) for tax purposes. Typically, the deductions can be up to 60% of AGI for cash contributions and up to 30% of AGI for appreciated securities.
2. Tax-Free Growth- Donations in a donor-advised fund grow tax-free, which may incentivize donors to continue giving and increasing their contributions. The investments made within the DAF continue to appreciate without incurring capital gains taxes. Over time, appreciation may lead to a larger pool of funds available for charitable giving, magnifying the donor’s philanthropic impact.
3. Avoidance of Capital Gains Tax- Contributions of appreciated assets such as stocks, real estate, or other investment assets not only qualify for a tax deduction but also enable the donor to avoid capital gains tax. Donors can avoid the capital gains tax that would typically be owed upon sale by transferring these assets directly into a DAF rather than selling them and donating the proceeds. It is important to note that donors must not liquidate securities before granting but donate the securities directly to the DAF, or capital gains tax will be due.
4. Estate and Inheritance Tax Benefits- DAFs may provide benefits in terms of estate planning. Contributions to a DAF are removed from the donor’s estate, potentially reducing the estate tax liability. If the DAF is a beneficiary, the assets may not be subject to probate. Donors must work with their financial, legal, and tax professionals to fully understand how donating DAFs as part of their estate plan may impact their situation.
5. Simplified Record Keeping- From a tax compliance perspective, DAFs may provide a more simplified means of record-keeping for donations. The DAF sponsor provides donors with all the documentation needed for tax reporting, eliminating the need to track multiple receipts from various charitable organizations.
In conclusion, DAFs present a wide range of tax benefits to donors while helping to facilitate their philanthropic intentions. These five tax benefits make DAFs an attractive vehicle for charitable giving and wealth management. Nevertheless, donors should consult with their financial and tax professionals to fully understand how to leverage the potential tax benefits of DAFs.
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