Tax Smart Giving – Donor Advised Funds

Written By: Brian Ellenbecker, CFP®, EA, CPWA®, CIMA®, CLTC®

Donating to charity is a great way to give back to the community. An added benefit beyond supporting a cause you’re passionate about are potential tax benefits you could receive as a donor.  However, ensuring you get the maximum tax benefit available can be more challenging than it appears on the surface. Depending on the amount you want to donate, the types of assets you have available, your other deductible expenses and your age can all have an impact on which charitable giving strategy will lead to the largest tax benefit.

This blog post will focus on some of the most popular and easily accessible gifting strategies available to people interested in supporting a charity.

Cash Donations

Perhaps the easiest way to donate to a charity is to simply give them a cash gift (write a check, transfer funds into their account, etc.). The biggest benefit is the ease of donating. However, this is rarely the most tax efficient option. Under current tax law, the only way to claim a charitable deduction is when you itemize. In 2024, the standard deduction for single filers is $14,600 and $29,200 for married and filing jointly. If your total itemized deductions don’t exceed the standard deduction, there is no tax benefit to your charitable donation.

Donating Appreciated Stock

Instead of donating cash, consider donating appreciated securities from your taxable investment/brokerage account. Not only are you able to potentially receive a charitable deduction, but you also get rid of the embedded capital gain. Because the charity that receives the appreciated security is tax-exempt, the security can be sold without realizing any taxable gain. To qualify for the capital gain exclusion, you must have held the donated security for more than a year (366+ days) and the market value must be higher than your cost basis.

However, to receive the charitable deduction, you must still itemize. Only about 10% of taxpayers can itemize their deductions, so you shouldn’t take for granted if you’ll be able to take advantage of the charitable deduction in this case.

Donor Advised Funds

A donor advised fund (DAF) is a charitable investment account that is also a 501(c)(3) public charity. Because it’s a 501(c)(3), contributions to a DAF qualify for charitable deductions. They have grown in popularity because they are easy to use, flexible and relatively inexpensive to operate.

The advantage to using a DAF over donating directly to charity is you can make a contribution to receive a deduction in the year of the contribution, but you don’t need to make a distribution to the actual charity until later. Under current law, there is no annual distribution requirement or limit as to how many years the contributions can remain in the DAF. While in the fund, the money will grow based on how it is invested.

Because of the ability to immediately deduct contributions but not be required to make charitable distributions until later, a DAF is a great vehicle to take advantage of a deduction bunching strategy.  Deduction bunching involves accelerating as many deductible expenses as you can into a single year to try to get as far over the standard deduction threshold as possible. For charitable contributions, that most likely means contributing several years’ worth of donations to a DAF in a single year to push your itemized deductions above the standard deduction as much as possible.  In subsequent years, you take the standard deduction. Once the donor advised fund balance is depleted, repeat the process.

For example, if you donate $10,000 a year to charity, contribute three years’ worth of contributions, or $30,000 to a donor advised fund. Doing so gives you a current year charitable expense of $30,000, which can be added to property taxes and state income taxes (capped at $10,000) plus mortgage interest to push yourself well above the standard deduction amount for the year. Donate appreciated securities, and you will also eliminate the embedded capital gain.

A well-managed deduction bunching strategy can be a great way to maximize the tax benefits available on your charitable giving.

Qualified Charitable Distributions

Qualified charitable distributions (QCDs) allow IRA owners who are at least 70½ years old to donate up to $105,000 directly from their IRA to charity. A QCD does not count as income, so you don’t have to worry about whether or not you’ll qualify for a charitable deduction—you get a tax benefit regardless of whether you itemize or claim the standard deduction. Because it doesn’t count as income to increase your adjusted gross income (AGI), you don’t have to worry about paying higher Medicare premiums, subjecting more of your Social Security to tax, or a myriad of other tax issues that could arise from otherwise taking additional IRA withdrawals.

Tax Planning as 2026 Approaches

With the higher standard deduction brought about by the Tax Cut and Jobs Act (TCJA) that passed in late 2017, QCDs have become much more popular because so few people are able to itemize their deductions.

In 2026, the TCJA is set to expire, with tax law reverting back to pre-2018 rules. If that happens, the standard deduction will be cut in half and the $10,000 cap on state income and property tax will be removed. For some, this could greatly improve their ability to itemize deductions, which could then change the relative attractiveness of some of the strategies discussed above.

While the TCJA is set to expire, it’s possible Congress could change any or all of the rules set to revert. We will all need to pay close attention to what is expected to happen as the end of 2025 approaches. It’s possible any changes made wouldn’t happen until very late in 2025, making any tax planning around the sunset of the law difficult.

For retirement account owners doing both tax and estate planning, the SECURE Act, which changed the distribution rules for inherited retirement accounts, adds an additional layer of complexity.

With the anticipated reduction to the standard deduction (and rise in tax rates), the desired timing of your charitable contributions, along with other potential itemized deductions like property taxes and possibly healthcare expenses, could change. You may want to consider enjoying the higher standard deduction for the next two years while planning for a larger DAF contribution in 2026. You may potentially be able to deduct more of your donation and the resulting deduction would offset income taxed at higher rates. Donating appreciated securities to your DAF will also eliminate the capital gains associated with those securities, essentially giving you a double tax benefit (charitable deduction plus capital gain reduction).

For retirement account owners who anticipate leaving funds to charitably inclined, non-spouse beneficiaries, consider naming a donor advised fund as the beneficiary of at least a portion of your retirement accounts. The IRA owner could even set up multiple DAF accounts for multiple heirs. Most non-spouse beneficiaries will need to distribute the entire inherited retirement account within 10 years. For larger accounts, the resulting tax liability could be substantial, especially considering the tax burden on most people is expected to increase in 2026.

Doing so allows the beneficiary to allocate what is likely to be one of their least income tax friendly assets to your beneficiary’s charitable goals, while also reducing the income tax burden that would result from the need to take distributions over the 10-year period.

If the beneficiary is 70½ or older, they can take QCDs from an inherited IRA, so naming a DAF as the IRA beneficiary is not needed in most cases.

Before implementing any of these strategies, it’s important to consult with your tax advisor. You should not only examine your current tax projections, but also consider longer term projections to ensure you are looking at as many relevant factors as possible before deciding on the appropriate strategy.

Please reach out to your Shakespeare Financial Advisor if you have questions on any of the rules or techniques discussed in this article and how they apply to your situation.