If you’re in search of a way to reduce your tax bill and give back to the community, a Donor Advised Fund 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.
Depending on the organization and account type you choose, your initial contribution may range anywhere from $0 to $250,000. You may contribute cash, stocks, bonds, mutual fund shares, private company stock, cryptocurrencies, and other types of assets through a DAF.
Also, the funds you contribute will accumulate and be tax-free to the charity. In addition, you don’t have to select a nonprofit beneficiary (charity) right when you make a contribution. Instead, you can wait to decide which IRS-eligible nonprofits you want to donate to and allow your investment to grow in value. Here’s a closer look at the most noteworthy benefits of a DAF.
Significant tax deductions prior to The ACE Act
You may claim a tax deduction the year you contribute to the DAF, rather than the year your contribution actually goes to the charity. Let’s say you donate $2,000 per month or $24,000 per year to a charity. If you’d like and are able to, you can prepay five years’ worth of donations by contributing $120,000 in a DAF today. While the DAF would use the funds to distribute $2,000 per month to a charity, you’d enjoy a $120,000 tax deduction this year instead of $24,000 per year for the next five years.
However, stay in touch with your financial professional as there are proposed legislative changes to when donors can receive the tax deduction if The Accelerating Charitable Efforts Act (ACE Act) passes in 2022. Under the ACE Act, donors will not receive the tax deduction until the charity receives the assets from the DAF. Also, any gifts given in 2022 prior to the ACE Act becoming law will automatically be included in the Act's requirements. The ACE Act will significantly impact those who give through Donor Advised Funds (DAFs) and Private Foundations (PF) as well as charitable organizations.
Less in Capital Gains tax
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. Also, if you donate assets that are valued higher than what you paid for them, you might be able to deduct their current market value as a loss on your taxes instead of what you originally paid.
The chance to 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.
Consult your financial professional
A financial professional can help you address the advantages of a DAF. Together we’ll help you review your financial situation and work towards meeting your goals. Contact us today to get started.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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