facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
The Tax Benefits of Donor-Advised Funds Thumbnail

The Tax Benefits of Donor-Advised Funds

Donor-advised funds, or DAFs, allow families and individuals to make tax-advantaged donations to charitable organizations. Similar to other investment accounts, a DAF allows donors to contribute assets to charitable organizations. Unlike other accounts, DAFs allow donors to take a tax deduction for a donation immediately and decide later how the donation should actually be used.

Below we’re breaking down what you need to know regarding donor-advised funds and the potential tax advantages of utilizing one. 

Donor-Advised Funds Considerations

One of the most notable differences between a DAF and other investments is that the money in a DAF may not be withdrawn. Once a donation is made, it is not returnable to the donor. This requirement, and others, set up DAFs to provide significant tax advantages.

Here are a few considerations to make when looking at the advantages of a donor-advised fund.

Tax Advantage #1: Multiple Asset Types are Accepted

Though cash donations do provide the largest deduction, donor-advised funds allow individuals to donate multiple types of assets. Acceptable asset types could include:

  • Cash
  • Stocks, bonds and mutual fund shares
  • Money in IRAs and 401(k)s
  • Private company stock
  • Cryptocurrencies
  • Life insurance

By no means is this an exhaustive list. It does, however, demonstrate the options donors have to diversify their donations, which in turn could potentially increase their charitable giving tax deductions. 

Tax Advantage #2: Investments Grow Tax-Free

Assets contributed to a donor-advised fund can grow tax-free. In addition, you are not required to donate those funds to a qualified charitable organization immediately, or even the year you made the contribution.  Instead, those funds may stay in place and continue to grow over time. This allows you to donate a larger sum to charity while still gaining the benefit of a deduction in your taxable income for the year in which the contribution was made.

Tax Advantage #3: Offset Capital Gains Tax

When an investor sells a stock that has made gains, they may be subject to paying capital gains taxes. Depending on the amount, this could account for a significant portion of the stock’s total value.

According to the IRS, this portion could be anywhere from 15 to 20 percent, and beyond, depending on asset type and income.

If you are considering a way to offset potential capital gains tax, DAFs allow stocks to be donated at their full value. This means that both the charity and the donor benefit -. the charity receives a larger donation, the donor receives a larger tax break. 

Tax Advantage #4: Simplifies Reporting

Normally, if one were to donate to individual charities, they would need to report each charity on their taxes for the year. Utilizing a donor-advised fund can simplify the process, as donors instead report the fund’s earnings and withdrawals as a whole.

Donor-advised funds give individuals an opportunity to max out their charitable contributions. And in some situations, much of the tax savings and account growth is directly passed on to the charity of your choice. This makes DAFs an enticing strategy for charitable individuals and tax-minded investors.

Reduced Estate Tax

Most people aren't subject to pay estate taxes; they only apply to those with estates of more than $13.61 million in 2024, although this threshold may drop precipitously in 2026. If you’re one of those few, putting money in a donor-advised fund can reduce the size of your taxable estate. Assets you put into a donor-advised fund aren’t subject to estate taxes, so they don’t count toward your total estate value.

A Legacy of Giving

Through shrewd estate planning, you can employ a Donor Advised Fund to continue charitable giving to causes you care about beyond your lifetime. There is also the option of bequeathing assets to your heirs, allowing them to continue your philanthropic project through giving to charities they want to support.

Donor-Advised Funds are a great way to provide long-term support to a cause or charity while realizing significant tax benefits.  Feel free to contact us to talk to one of or Advisors about how a Donor-Advised Fund would fit in your comprehensive financial plan.

Talk to an Advisor