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donor advised fund tax deduction

A donor-advised fund is an account that lets the donor direct how and where to distribute assets in the fund. Donor-advised funds can simplify making charitable contributions to favorite causes and also provide the donor with valuable tax deductions. Gifts made to donor-advised funds can be deducted from current income, subject to limitations. Cash gifts can be deducted up to 60% of adjusted gross income, while gifts of other assets, such as stock, can be deducted up to 30% of adjusted gross income. Consider working with a financial advisor to set a donation plan that’s right for you. 

Donor-Advised Fund Basics

Donor-advised funds are special accounts set up to facilitate charitable giving. The accounts can be created easily online using public charities set up by financial services firms. Donor-advised fund sponsors may require no minimum initial contribution. However, the financial services firm will charge an annual fee for sponsoring the account.

Once created, assets such as cash or stocks can be transferred into the fund using online transactions. Assets transferred into a donor-advised fund no longer belong to the donor but are owned by the sponsoring organization. Transfers are irrevocable, meaning the donor can never regain control of them for personal use. However, the donor can select and recommend IRS-qualified 501(c)3 charities to receive gifts from the fund’s assets.

Benefits of Donor-Advised Funds

Unlike a private foundation, a donor-advised fund doesn’t have to make any grants. When the donor dies, the remaining assets in the fund can be bequeathed to heirs to continue the charitable legacy. Heirs can serve as advisors to the fund’s charitable grantmaking activities, but assets still can only be used to support recognized charities.

Donations of non-cash assets, such as stocks, are likely to be easier to make to a donor-advised fund than to a charity. Non-cash assets generally accepted by donor-advised funds include shares of publicly traded companies, bonds, mutual fund shares, private business ownership interests, life insurance, IRA assets, oil and gas royalty interests and cryptocurrency.

Another attraction of donor-advised funds is that donations to charities can be made anonymously. This makes them appealing to people who want to maintain privacy about their charitable work.

Donor-Advised Fund Tax Deduction Details

donor advised fund tax deduction

The number of donor-advised funds in the United States rose to more than one million in 2021, according to a survey by the National Philanthropic Trust of 976 trust sponsors. One reason for the growth of donor-advised funds is the availability of significant tax deductions. When the owner of a donor-advised fund makes a gift to the fund, it can create an immediate tax deduction to apply against current income. The deduction for a gift made in cash is limited to 60% of the giver’s adjusted gross income. Gifts of other assets can be deducted up to a limit of 30% of adjusted gross income.

The overall limit of deductions to a donor-advised fund is usually 50% of adjusted gross income unless the gift is all in cash. These limits apply to all gifts to public charities combined, including gifts to the donor-advised fund.

In addition to getting an immediate deduction for the donor, any earnings on investments made by the fund are free of federal income taxes. This allows the funds to grow faster and, potentially, enable larger gifts.

Donor-Advised Fund Tax Strategy

One popular tax strategy with donor-advised funds is to donate stock that has appreciated in price. If the shares were sold to make cash available for a gift, the difference between the purchase price and the sale price would be taxable as capital gains, reducing the amount available for giving.

Short-term capital gains on assets held less than one year are taxed at the taxpayer’s ordinary rate, which can be as high as 37%. Long-term capital gains held for more than a year are taxed at rates varying from 0% to 20%.

Donating long-term appreciated stock to a donor-advised fund avoids creating a taxable sale, so the gift is potentially 20% larger. The larger gift also creates a larger deduction for the taxpayer.

Bottom Line

donor advised fund tax deduction

Donor-advised funds allow people to financially support their favorite causes while receiving valuable tax deductions. It’s easy to give non-cash items such as stocks to a donor-advised fund, which can then distribute funds as cash grants to charities. Donating appreciated equities is a particularly useful technique because it avoids a taxable sale so there are more funds to give to charities while the taxpayer also gets a bigger deduction.

Tips on Estate Planning

  • A financial advisor can help you select a philanthropic vehicle that fits your financial goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Only 501(c)3 charities recognized by the Internal Revenue Service can receive support from donor-advised funds. That leaves out political organizations, private foundations and crowdfunding campaigns. Grants also can’t go to anything that would provide the donor with a personal benefit. A grant could support a scholarship open to all applicants, for instance, but not pay tuition for a relative.

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Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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