Charitable giving and tax benefits
There are many things to consider when mapping out your tax plan for the year. One thing to take into account is how charitable giving might impact your tax situation both now and in retirement. It is essential to plan your charitable giving because, when done efficiently, that benefits you and the church or organization(s) you intend to bless with your donation. As mentioned in a previous article, a Donor Advised Fund (DAF) is a great way to leverage your giving for tax benefits. This article will discuss why a DAF is helpful and how to utilize it.
What Is a DAF, and why should I use one?
If you have been blessed with resources and a desire to give out of your excess, then using a DAF is a practical way to do your giving and minimize your tax bill simultaneously. A DAF is separate from your investment accounts and is maintained by a section 501(c)(3) organization, which is known as the “sponsoring organization.” It is important to note that once the money or securities are donated to the sponsoring organization, they have legal control over it. However, the donor or their advisor retains the distribution and investment privileges concerning the donated funds in the account.
Because a donation to a DAF is immediately tax-deductible, it allows you to donate while still deciding what organization(s) to support. The DAF houses your contribution and can even grow, depending on how it’s invested while in the DAF, while you decide where those dollars will ultimately end up. In short, a DAF is a tax-advantaged way to support causes you love at a pace that is right for you.
How to Use a DAF
To get started, you should identify how much you can put into the DAF. It might help to work backward and determine your estimated tax bill, then decide how much of a deduction you need. Remember, the contribution to the DAF only impacts your tax standing in the year of that donation. Donations from the DAF to organizations of your choice do not carry any additional tax advantages. You’ll need to establish a DAF account and determine which appreciated stocks, mutual funds, or cash you want to donate to the DAF. Many large custodians offer DAF’s. Contact your advisor if you need help getting started.
When to Use a DAF
When you have appreciated stock in a brokerage account or a required minimum distribution from an IRA that could increase your tax liability, donating those securities and/or cash to the DAF will allow you a tax write-off. Sometimes the amount you need to write off exceeds what you might want to give to your favorite charity in a given year, so the DAF allows you to make a large donation all at once, then spread that out to different organizations over time as you see fit.
A DAF is a helpful tool but is not necessarily for everyone in every stage of life. Talk to any of our eleven advisors today if you want to utilize a DAF to increase your tax agility and bless those causes closest to your heart.
MAXIMIZE YOUR GIVING THROUGH A DONOR-ADVISED FUND
June 15, 2023
Nick Allen
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