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Saving & Generosity: How a Donor-Advised Fund Could Help You Do Both

By Michael Nedreski

Generosity has so many personal benefits, the biggest of which being the joy caring for others can bring. Although being generous and saving money might seem to be on opposite sides of the spectrum, this isn't necessarily the case. With a donor-advised fund, you have the opportunity to lower your taxable income while donating to causes you personally care about. Here's how these funds work.

Charitable Giving Under the Tax Cuts and Jobs Act (TCJA)

If you're charitably inclined, you're probably used to itemizing your deductions. However, with the increased standard deduction and the limit on deductions for state and local taxes, you may not have received as much of a tax benefit for your giving in the past few years since the TCJA went into effect in 2017 as you have previously. Essentially, your benefit for giving to charity has now been reduced by more than 30%.

What Is a Donor-Advised Fund?

This is why donor-advised funds (DAF) are gaining popularity. A DAF acts as a philanthropic savings account. You put money into it for the purpose of giving to charity and let it sit there until you are ready to give. Unlike a savings account, though, all contributions are irrevocable. Once you put an asset into a DAF, you can't take it back. 

Because you can't take back your contributions, they are considered complete charitable gifts and immediately tax-deductible. You can take the tax deduction right away even if you wait several years to pass the money on to charity. Though you don't technically retain ownership when you put money or assets into a DAF, you are still able to guide, request, and recommend where the money goes. You get to name your DAF account, advisors, successors, and beneficiaries, and the holder of the DAF makes the ultimate decision on where the funds go. If you're worried about letting control of your money go, know that most DAF holders will honor donor wishes as long as the recommendation complies with legal and tax requirements and grant-making policies.

Tax Benefits of a Donor-Advised Fund

DAFs offer several tax benefits. First, you get to take an immediate deduction when you contribute, even if the money has yet to be given to the charity of your choice. Any limit to the deduction you're allowed to take depends on what kind of assets you contribute to the DAF.

Publicly traded securities are a popular asset to contribute to a DAF. This is because you can avoid paying long-term capital gains taxes and still deduct the fair market value of the securities (if held over a year). If you buy a security at $100 and put it in a DAF when it's worth $200, you get to deduct $200 of charitable giving without paying taxes on the $100 in gains.

Contributions of long-term capital gain property, like appreciated securities, can be deducted up to 30% of adjusted gross income (AGI). For all other cash contributions, you can deduct up to 60% of your AGI. If your contributions exceed your deductible limit, you can carry them forward to the next tax year.

Also, all contributions can be invested within the DAF to grow tax-free. Once assets are in a DAF, they belong to a charity and are therefore exempt from taxes.

How Are Donor-Advised Funds Used?

Let's take a look at an example. The 2022 standard deduction for a married couple filing jointly is $25,900, and $27,700 in 2023. Assume that you have been donating $15,000 per year to charity. When combined with your property taxes and mortgage interest, you have total itemized deductions of $31,000 each year. That means you only receive a tax benefit for $5,100 of your giving in 2022 and $3,300 in 2023. Your total tax deductions over the two years are $62,000.

Now, instead imagine that you open a donor-advised fund in 2022 and contribute $30,000 to it to cover your charitable giving for 2022 and 2023. In 2022, you will have itemized deductions of $46,000 ($16,000 of mortgage interest and property tax combined with $30,000 contributed to a DAF). Then in 2023 you can simply take the standard deduction since you have no charitable giving to report. Your total deductions over the two years will be $73,700.

By utilizing a donor-advised fund, you end up with $11,700 more in deductions over the course of two years. If you are in the 24% tax bracket, that's a tax savings of over $2,800. If you donate appreciated securities to the DAF, your tax savings will be even greater because you will not face capital gains tax on the disposal of the assets.

Are You Ready to Save Money With a Donor-Advised Fund?

Donor-advised funds give you the flexibility to continue to save for your future while helping others. With all the changes to tax laws recently, these funds let you take advantage of tax benefits while loving and serving others through your donations.

At White Oak Wealth Partners, your desires for the future become our goals when helping you develop a solid financial plan, and that includes your charitable giving strategy. We love working with people who care about their families and their communities and have found that partnering with a financial advisor helps people practically envision their future. To get started and learn more about DAFs, contact us by calling 814-835-4551, emailing MICHAEL.NEDRESKI@LPL.COM, or scheduling an appointment here.

About Michael

Michael Nedreski is managing partner at White Oak Wealth Partners, a specialized financial lifestyle and wealth management firm serving entrepreneurs, business owners, executives, and their families. Mike has 30-plus years of experience in the financial services industry and is committed to serving his clients through holistic financial planning, disciplined investment strategies, and proactive personal service. Mike and his team are continuously looking for innovative and proactive ways in which to serve their clients, acting as their independent wealth coach and personal CFO. 

A native of Erie, Pennsylvania, Mike began his career in the financial services industry in 1988. He has earned the Chartered Retirement Planning CounselorSM (CRPC®) conferred by College for Financial Planning and Life Underwriting Training Council Fellow (LUTCF) designations. Mike is also an active member of the Financial Services Institute (FSI) and Financial Planning Association (FPA).

When not working, Mike enjoys spending time with his wife, Amy, and their seven children. He volunteers in his community and at his church and his children's schools. An outdoors enthusiast, Mike loves hunting, fishing, golfing, and spending time near or on the water. He also enjoys working out and watching some of his favorite sports teams, the Pittsburgh Pirates and the Cleveland Browns. To learn more about Michael, connect with him on LinkedIn.

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.