Donor Advisor Funds Remain a Popular Giving Tool
When times get tough, Americans get charitable. In particular, the use of Donor Advised Funds (DAFs) has been on the rise throughout the pandemic. One Barron’s piece I spotted cited a 20.6% increase in tax-deductible contributions made to DAFs in 2020, as well as a 27% increase in donations distributed out of them that same year. 
Most of us also enjoy receiving a tax break for our charitable giving. Unfortunately, ever since the 2017 Tax Cuts and Jobs Act doubled the standard deduction for most taxpayers, you must now give a whole lot in any one year to make it worth itemizing and receiving a direct deduction for your generosity.
Enter the DAF. A DAF is a charity itself. So, when you fund it, it’s a charitable donation. Your funds are typically invested per your guidance. You then advise the DAF administrators on when to distribute funds to which charities. Basically, instead of giving some to your DAF every year, you can give more to it in a single year. Then have your DAF distribute contributions to your chosen charities over several years.
Let’s say you and your spouse incurred at least $10,000 in state taxes and $7,000 in mortgage interest in 2021, and you plan to donate $6,000 to charity, for $23,000 total. Since your 2021 standard deduction is $25,100, you won’t get any tax benefit from your itemized deductions, including any charitable deductions. Instead, you could donate $30,000 to a DAF, and then advise your DAF to grant $6,000 annually to your favorite charities.
In year one, your itemizable deductions are now $47,000 total. You can now itemize them for tax savings in the range of $6,000. Deductions for your future annual contributions from the DAF will be $0 (since you took the entire deduction up front), but that’s ok. You’ll take the standard deduction for the next four years.
As a bonus tip, instead of donating cash, consider donating appreciated stocks or funds out of your taxable accounts, eliminating their embedded capital gains taxes while you’re at it. Better still, when donating an appreciated mutual fund, do so before the fund manager distributes its own annual gains to shareholders, to shave off those taxable fund distributions.
Last but not least, do read the fine print when choosing a DAF. They aren’t all identical.
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, a sport that requires discipline, patience, and vision. John applies these same skills to his professional pursuits: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and reaching their distant goals along a clear path. Learn more at www.alliantwealth.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.