Could a Donor-Advised Fund Save You Money on Taxes?

By Brett Gottlieb

Can you think of one person who doesn’t want to minimize their taxes and be generous at the same time? Neither can I. Donor-advised funds could be a great option to lower your taxable income, which will then decrease the amount you pay in taxes and simultaneously give more money to causes you care about. It’s a win-win situation.

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%.^[1]

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 (get to if held over a year). If you buy a security at $100 and put it in a DAF when it’s worth $200, you 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.^[2]

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.^[3]

How Are Donor-Advised Funds Used?

Let’s assume all your spending numbers will be the same for the years 2022 and 2023. The 2022 standard deduction for a married couple filing jointly is $25,900,^[4] and for now, we’ll assume it stays the same for 2023. If you continue to give and itemize as usual, then you will have itemized deductions of $26,000 each year. That means you only receive a tax benefit for $100 of your giving in both 2022 and 2023 ($26,000 itemized minus the standard deduction) and your total deductions over the two years are $52,000.

Now, instead imagine that you open a donor-advised fund in 2022 and contribute $20,000 to it to cover your charitable giving for 2022 and 2023. In 2021, you will have itemized deductions of $36,000. 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 $61,100.

By utilizing a donor-advised fund, you end up with $9,100 more in deductions over the course of two years. If you are in the 24% tax bracket, that’s a tax savings of over $2,000. 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?

Don’t let tax laws keep you from donating to charities and organizations you care about. Even with the new higher standard deductions, donor-advised funds make it possible to continue receiving a tax benefit for charitable giving. If you want to learn more about how a donoradvised fund can minimize your taxes so you can increase your generosity, our team at Comprehensive Advisor is here to help. Email us at info@ComprehensiveAdvisor.com or call (760) 813-2125 to get started.

About Our Advisors

Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly two decades of industry experience. He graduated from California State University-Chico with two bachelor’s degrees in Business Administration and Economics. Brett is Life Insurance licensed in several states. He is passionate about guiding his clients on retirement income planning, helping each client pursue their specific retirement goals and defending the assets his clients have worked so hard to achieve. Brett is a California native and currently resides in San Elijo Hills with his beautiful wife and three children.

With a combined experience of over three decades in the financial services industry, our advisors hail from some of the largest independent broker/dealers and banking institutions in the country. They have dedicated their professional careers to creating personalized financial solutions for individuals and families who seek successful retirement planning and currently offer investment advisory services through AE Wealth Management, LLC. Our advisors take a common-sense approach to the planning process and work with clients to create a retirement road map to help ensure their assets are protected and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County and beyond. Learn more by connecting with Brett on LinkedIn or email them at info@ComprehensiveAdvisor.com.

Comprehensive Advisor, LLC is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Comprehensive Advisor are not affiliated companies. C.A. Financial & Insurance Services, CA Ins. Lic. #6000262. This material is intended to provide general information and is believed to be reliable, but accuracy and completeness cannot be guaranteed. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Comprehensive Advisor, LLC. Neither the firm nor its representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. 1224726-2/22

[1] https://www.taxpolicycenter.org/briefing-book/how-did-tcja-affect-incentives-charitable-giving

[2] https://www.schwabcharitable.org/non-cash-assets/public-traded-securities

[3] https://www.fidelitycharitable.org/guidance/philanthropy/what-is-a-donor-advised-fund.html#:~:text=When%20you%20contribute%20cash%2C%20securities,any%20IRS%2Dqualified%20 public%20charity

[4] https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022