If you’re in search of a way to reduce your 2023 tax bill and give back to the community, donor advised funds may be worth considering. Also known as a DAF, a donor advised fund is a charitable investment strategy you can use to support charities that are important to you, while receiving tax-advantages. You may contribute cash, stocks, bonds, mutual fund shares, private company stock, cryptocurrencies, and other types of assets through a DAF.
New SECURE 2.0 law tax benefits for 2023
You may claim a tax deduction the year you contribute to the DAF, rather than the year your contribution actually goes to the charity. Note that this is new legislation for 2023; previously donors didn’t receive the tax deduction until the charity received the DAF assets.
Using the DAF five-year carrying forward strategy, you can prepay five years’ worth of donations, taking the combined contributions as a tax deduction this year. Here’s an example of how the five-year carry forward strategy works:
Let’s say you donate $1500 per month or $18,000 per year to a charity. If you’d like and are able to, you can prepay five years’ worth of donations by contributing $90,000 in a DAF today. While the DAF would use the funds to distribute $1500 per month to a charity, you’d enjoy a $90,000 tax deduction this year instead of $18,000 per year for the next five years.
When the charity receives the gift, they are responsible for taxes, if applicable, depending on their tax status.
Selecting a non-profit beneficiary
You don’t have to select a nonprofit beneficiary (charity) immediately when making a contribution to a DAF. Instead, you can wait to decide which IRS-eligible nonprofits you want to donate to. Waiting to designate a non-profit provides more time for the DAF’s investment strategies to accumulate in value. Here are other things to note about DAFs:
- There are no contribution limits on how much a donor may contribute to a DAF.
- All contributions to the DAF are irrevocable and cannot be taken back once they are gifted.
- All donated assets belong to the sponsoring organization, with the donor maintaining advisory and grant-making privileges.
- All grant recommendations from DAFs must be approved by the sponsoring organization.
DAFs as a tax-savings strategy
Capital gains taxes are imposed when you make a profit from selling an asset. Fortunately, you won’t be responsible for capital gains taxes on assets you contribute to a DAF as long as you don’t liquidate the assets first and then donate them to the DAF. Here’s other things to know about DAFs and taxes:
- Publicly-traded securities or illiquid gifts that have been held for more than one year must be donated at fair market value directly to the DAF.
- Donors can receive an immediate income tax deduction for cash, check, or wire transfer of up to 60 % of adjusted gross income (AGI).
- The deduction for securities and other appreciated assets (i.e. closely held stock, real estate, illiquid assets) is up to 30 % of AGI.
Leave a legacy through giving
When you design your estate plan, you can request that any remaining assets in your DAF be donated to the charities of your choice after you pass away. Another option is to pass the assets to your heirs so they can continue your philanthropic efforts and give to the charities they support.
