As the year draws to a close, it is the perfect time to reflect on your charitable giving goals and consider ways to maximize your impact—both for the causes you care about and your financial well-being. One of the most powerful tools in a philanthropist's toolkit is a Donor-Advised Fund (DAF). Opening a DAF before December 31 can unlock significant benefits for you and the organizations you support.
Let’s discuss why establishing a Donor-Advised Fund now is a smart move.
1. Immediate Tax Benefits
Contributions to a Donor-Advised Fund are tax-deductible in the year they are made, even if you do not recommend grants to charities until later. Opening a DAF before the end of the year allows you to:
Offset this year’s taxable income: A DAF contribution reduces your adjusted gross income (AGI), potentially lowering your overall tax liability.
Maximize deductions: Donations of cash can be deducted up to 60% of your AGI, while donations of appreciated assets (e.g., stocks or mutual funds) can be deducted up to 30% of your AGI.
Example:
If you’re facing a high-income year due to a bonus, sale of a business, or other taxable event, opening a DAF allows you to take a sizable deduction now while planning your charitable giving over time.
2. Simplify Your Giving
A DAF acts as a centralized account for all your charitable contributions, streamlining the process and minimizing paperwork. By consolidating your giving into a single fund, you:
Avoid last-minute scrambling: There is no need to identify specific charities by year-end; you can take your time to research and decide later.
Track contributions easily: A DAF provides clear records for tax purposes, making filing simpler.
3. Amplify Your Impact with Appreciated Assets
Donating appreciated assets, such as stocks, mutual funds, or cryptocurrency, to a DAF offers dual advantages:
Avoid capital gains taxes: By contributing directly to a DAF, you bypass the capital gains tax that you would incur if you sold the asset first.
Maximize the value of your donation: You can deduct the fair market value of the assets, allowing more funds to go to charitable causes.
Example:
If you donate $50,000 worth of stock that you purchased for $20,000, you avoid paying capital gains taxes on the $30,000 appreciation while receiving a $50,000 deduction.
4. Bunch Contributions for Greater Tax Efficiency
With higher standard deduction thresholds, many taxpayers no longer itemize annually. However, by "bunching" several years’ worth of charitable contributions into a DAF in a single year, you can:
Exceed the standard deduction: Itemize your deductions in the year of the DAF contribution while spreading grants to charities over multiple years.
Plan strategically for taxes: Bunching allows you to front-load your giving for tax efficiency while maintaining flexibility for future philanthropy.
5. Support Causes When They Need It Most
Nonprofits often face financial pressure at year-end, with increased demand for services during the holiday season. Opening a DAF now enables you to respond to these immediate needs while enjoying tax benefits for the current year.
Example:
If disaster strikes or a critical need arises in early 2024, your DAF is already funded and ready to support relief efforts without delay.
6. Streamline Estate Planning
Opening a DAF before year-end also contributes to a long-term philanthropic legacy. By including your DAF in your estate plan, you can:
Reduce estate taxes: Contributions to a DAF are excluded from your taxable estate.
Ensure lasting impact: DAFs allow you to involve family members in charitable decisions, fostering a tradition of giving across generations.
7. Grow Your Contributions Tax-Free
Once funds are contributed to a DAF, they can be invested and grow tax-free, increasing the total amount available for grants. By opening a DAF before year-end, you set your contributions up for potential growth in the coming year.
8. Act Now for a Stress-Free Start to the New Year
The final months of the year are a busy time for everyone, including financial institutions. Opening a DAF now ensures your contributions are processed in time to count for the current tax year. Avoiding last-minute delays or complications gives you peace of mind heading into the new year.
How to Get Started
Opening a Donor-Advised Fund is a straightforward process:
Choose a sponsoring organization: UI Charitable Advisors is recognized as the most flexible DAF in the industry.
Make a contribution: Fund your DAF with cash, appreciated assets, or other eligible donations.
Decide on investment preferences: Select how you would like your contributions to be managed over time.
Start recommending grants: Support your favorite charities when you are ready.
A Gift That Keeps on Giving
Opening a Donor-Advised Fund before the end of the year is not just a savvy tax strategy—it is a meaningful way to create lasting change. By combining financial planning with philanthropic goals, you can make the most of your resources and ensure your generosity continues to make an impact for years to come.
