Wondering who should contribute to a Donor-Advised Fund? Stacking, when filing your tax return, your taxable income will be reduced by the greater of the sum of your itemized deductions or the flat standard deduction. Since the Tax Cuts and Job Act of 2017 nearly doubled the standard deduction and imposed stricter limitations on itemized deductions, fewer taxpayers are benefiting from itemized deductions for their charitable giving. To potentially increase the overall tax benefits for charitable giving, a DAF can be used to frontload multiple years of tax deductions from charitable donations into a single tax year to push itemized deductions over the standard deduction threshold. Charitable, high-income households with itemized deductions just under the standard deduction threshold may want to consider using a DAF to facilitate a large upfront tax deduction for charitable giving. Contributions to a DAF can be more valuable during high-income tax years because the tax-deduction limit for charitable donations increases with income.
You are probably asking what are the tax benefits of contributing appreciated investments to a Donor-Advised Fund. Donating appreciated investments to a DAF can provide multiple tax benefits. First, you may receive a tax deduction equal to the current market value of the investment contributed, subject to certain limits and restrictions. Second, if you still want to own the investment you contributed to the DAF, you can just rebuy it at its current price. Now you own the same investment but have rid yourself of its previous unrealized capital gains.Third, assets invested in a DAF grow tax-free and can be distributed to charity at the donor’s convenience. No taxes are due if the investments in the DAF earn dividends, pay interest, or are sold for a gain. In short, once you contribute assets to a DAF, you no longer need to worry about paying taxes generated by the investments you donated.