Tax Advantages of Donor-Advised Funds
Giving with a donor-advised fund can be a tax-efficient way to conduct your philanthropy. Below are a few strategies to reduce your tax liability using a donor-advised fund while increasing your charitable impact.
Grow Your Charitable Dollars Tax-Free.
The charitable dollars in your donor-advised fund (DAF) can be invested before they are granted out. With market growth, your DAF balance can also grow. This makes even more money available for grantmaking. Moreover, while you can take an immediate tax deduction for the gifts you make to your DAF, you will not be taxed on any growth, since the assets belong to the DAF’s charitable sponsor.
Reduce Tax Burden in a Windfall Year.
DAFs can reduce tax burdens after a windfall situation, such as receiving an inheritance, selling a business, or experiencing strong market returns. You can take an immediate tax deduction when you make a charitable contribution to your DAF, reducing your tax liability. DAFs allow you to recommend grants to your favorite charities over time, so you can effectively pre-fund years of giving with assets from a single high-income event.
Contribute Appreciated Assets to Reduce or Eliminate Capital Gains.
Direct donation of publicly traded securities (or other illiquid gifts) is one of the most common ways to fund a DAF. This is a particularly tax-efficient method because securities that have been held for more than one year can be donated at their fair market value, and are not subject to capital gains tax. If a donor were to liquidate their assets and later donate the proceeds to their DAF, the amount would be reduced by capital gains tax, leaving less money available for philanthropy. Donors receive an immediate tax deduction of up to 30% of adjusted gross income (AGI) for gifts of appreciated securities, mutual funds, real estate and other assets, and can enjoy five-year carry-forward deduction on gifts that exceed AGI limits.
Hudson Community Foundation enables simple, smart and meaningful family philanthropy. Although HCF is itself a public charity, it does not promote any one charitable cause. Rather, HCF is committed to expanding the capacity of family philanthropy - no matter where you client live. Because of this unique mission, HCF can assist you to achieve your goals in ways not available through other organizations or strategies.
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*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented, nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced to provide information on a topic that may be of interest.