How to Use a Donor-Advised Fund to Reduce Your Taxes This Year

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No one likes to pay more taxes than necessary. If you would like to reduce your taxes before the year’s end, there are several ways to do it—but there is not much time left for most tax strategies. You need to move quickly for most options if you want to lower your tax bill this year.

Choose Donor-Advised Funds

Creating or using an already established donor-advised fund (DAF) to contribute to your favorite charity can give you a considerable tax break. This tax strategy enables you to donate money directly to the charity without tax consequences.

When your charitable gift is donated directly to the charity, you avoid the capital gains tax on your contribution. SVB says you can donate cash, various kinds of stock, required minimum distributions (RMDs), and possibly even real estate through a DAF.

Types of Assets You Can Give Through a DAF

Morgan Stanley says that a DAF enables you to donate other types of assets. You can also give cryptocurrency, art, cars, and other vehicles.

Donating your RMD to a qualified charity is called a qualified charitable distribution (QCD). The amount donated is subtracted from your adjustable gross income, which reduces your taxable income. The maximum amount of an RMD you can donate to a QCD is $100,000, but a married couple filing jointly can give up to $200,000.

Other contributions made to a qualified charity can go much higher. Cash donations can be as high as 60 percent of your adjusted gross income (AGI).

The Amount You Need to Donate

Although you can give money and assets to a DAF at any time, there is only one way to reduce your taxes. Fidelity says that you must itemize it to reduce your taxes. Contributions must be more than the standard deduction to get a tax benefit from it. In 2023, the standard deduction for singles is $13,850; for a head of household, it is $20,800; and for married couples filing jointly, it is $27,700. Only amounts above the standard deduction will reduce your taxes.

You can give more if you donate the assets or money directly rather than cashing it out and giving the proceeds to the charity. It will provide an additional 20 percent more. If you have owned the stock or other asset for more than a year, then neither you nor the charity will need to pay taxes on it.

Advantages of Giving Through a Donor-Advised Fund

You can put your assets into a DAF, which is controlled by a 501(c)(3), and let them sit there collecting interest. After you have decided where you want to gift the assets—or part of them—you can dole them out.

A DAF also enables you to dole out money over a several-year period. It does not need to be a one-time gift. Your family members can also use the same DAF to contribute to their favorite qualified charities and get a tax break.

Before putting any money into a DAF, you should think twice about it. Money contributed to a DAF is irrevocable and you cannot get it back.

The Deductions

Donating to a DAF gives you an immediate tax deduction of the amount you contribute—or the assessed value for non-cash items. The amount you can put into a DAF varies depending on the type of asset. When you donate cash, you can contribute up to 60 percent of your AGI. AEFOnline says you can contribute up to 30 percent of your AGI when you give securities and other appreciated assets.

When you donate property to a DAF you will no longer have any real estate taxes. When your gifts in the DAF appreciate, you will not face any capital gains tax.

There may also be occasions when you want to contribute more than the allowable deductible amount. When you do this, you are allowed five years to deduct the amount above the permitted total.

Contribute Now for Advance Donations

If you had a windfall or larger-than-usual income this year and are looking for a big tax break, a donor-advised fund can help you. A DAF can also help reduce taxes when you sell a business or receive an inheritance.

NerdWallet says you can donate money for the next several years at once and get a large tax break for it this year. As an example, you could donate $120,000 this year, and then the DAF donates $24,000 each year to your favorite charity for the next five years.

The funds in the DAF earn interest without any taxes on your part. By letting some money or assets sit in the account, you will earn more money to donate later.

Other Benefits of a DAF

A DAF can be used to reduce taxes when taking an RMD from a retirement account. You can also use it to reduce your taxes when you convert money from a traditional IRA or 401(k) to a Roth account. A Roth account gives you the advantage of not having any RMDs, but you must pay taxes when you make the conversion.

Contributing to a donor-advised fund can give you an immediate tax deduction. Not much time is left this year to act if you need a tax break now. Consult a financial adviser for available DAFs that align with your personal interests and financial goals.

The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.