Values Added

The charitable hack that saved me thousands in taxes and increased my mindfulness

For much of my adult life, every December 31st I’d fall into the same trap. Around Thanksgiving, I’d remember that I was supposed to do my charitable giving for the year. I’d think about how meaningful it would be, how much of a difference it would make, how carefully I’d choose the organizations, how my ritual would work and then, well, I would get distracted and do something else instead. Then, I’d lose the thread, get busy and finally, on December 31st, staring the deadline in the face I’d spring into frenzied action. I’d simplify the plan, whip out my credit card and get to work. In the frenzy, at least one of my credit cards would usually get shut down for suspected fraud. You’d think they’d be hip to the pattern that I gave a lot of money each 12/31 but the credit card companies didn’t seem to catch on.

Are you sick of the end of year frenzy for your charitable giving plans? Tired of sacrificing family time on December 31st to make charitable contributions at the last minute that feel impulsive and unplanned? We have a solution for you! You should consider creating a Donor Advised Fund (DAF) that will allow you to make charitable giving meaningful, easy and enjoyable. Not only that, it may save you thousands in taxes.

It has transformed my giving from frenzied to mindful and it’s saved us a lot of money on taxes too. This is a powerful tool and I hope it helps you as much as it has helped me.


What is a Donor-Advised Fund (DAF)?

DAFs are administered by nonprofits like Community Foundations or Schwab Charitable. They function like your own personal foundation but are much cheaper and easier to operate. To participate in a DAF, you open an account and donate stocks, mutual funds, or cash to the fund. After that, you can recommend grants from the fund to nonprofits of your choice, but you can’t withdraw the funds for your own use. Until all of the funds are used for grants, they can be invested and grow (or shrink) as with other investments. 

You get a tax deduction in the year you donate to the DAF, regardless of when the grants to nonprofits are actually made. This allows you to make donations in the years that are best for you for tax purposes while allowing the charities to still receive consistent gifts every year (or whenever you like). DAFs can also make tax time a lot simpler because you can just report occasional big donations to the DAF and don’t have to track every single individual grant from the DAF to charities. No more digging through statements to find your charitable deductions or having stressful marathon giving sessions on 12/31!


Who should consider a DAF?

If you give (or plan to give) significant support to nonprofit charities, you are a strong candidate for a DAF. DAFs are particularly beneficial for donors who sometimes itemize their charitable contributions and for those who have appreciated stocks in their investment accounts. The more charitable you are, the more a DAF is likely to help. 

Even if you plan to give smaller amounts after the initial contribution, using a DAF may still be a good idea because it helps make charitable giving meaningful, easy, and enjoyable. Aside from the tax benefits discussed below, DAFs can cut down on junk mail, help nonprofits avoid paying credit card fees, and help systemize your charitable giving.


How can DAFs save money on taxes?

Let’s say you buy ten shares of stock for $1500 and, over a few years, they grow in value to $3,000. If you sell them, you’ll have to pay long-term capital gains (LTCG) tax on the $1,500 it increased. If your long term capital gains tax rate is 15%, then you’d owe $225 (15% of $1,500) in federal capital gains taxes.

If you donated the $3,000 worth of stock to a DAF or another charity, you can get the same $3,000 tax deduction as if you had donated cash and you’d avoid paying that $225 in capital gains taxes (and likely state taxes as well). That’s why we often recommend setting aside the stocks with the largest capital gains to contribute to a DAF. We’ve helped clients who donate a lot to charity reduce their taxes by thousands of dollars this way. 


For whom is this strategy a bad fit?

When donating stock to a DAF, the tax deduction is taken upon the transfer of stocks to the fund, not when the money is distributed. This deduction is limited to 30% of your Adjusted Gross Income (AGI) so everyone, including people using DAFs, should be careful when planning to make donations that would exceed this limit. Though the excess can carry over to the next year, people who otherwise would take the standard deduction that year may lose out on the benefit. 

If you always take the standard deduction, a DAF can be useful for record-keeping and administration, but it probably won’t reduce your taxes. 

Many people prefer to give to political parties, political candidates, 501(c)4 campaigns, or other organizations that can’t receive tax-deductible donations. DAF administrators won’t approve requests for distributions to these types of organizations, so donors should make these contributions directly instead.


What does it mean that I may “advise” on donations?

For compliance and legal reasons, the donor of a donor-advised fund “advises” the DAF on how to distribute the money. Technically, the donor is just an advisor and can’t force the DAF to make a particular grant. But, in practice, it is extremely rare for a DAF administrator to deny a request to distribute money to a properly registered nonprofit charitable organization. It sometimes takes a few days for the DAF administrator to confirm the IRS status of the organization, but we’ve never seen a denial of a grant to a 501(c)3 charity. 


What are some common issues with implementation?

DAFs often require initial contributions of $5,000 or more. Several major DAFs like Schwab Charitable or Fidelity Charitable currently charge annual administrative fees of $100 or 0.6% of assets and offer low-cost index fund options for investments. It’s important to check both the administrative fees and investment fees the DAF charges to be sure they’re reasonable. Because the administrative fees include the DAF sending charities checks, using a DAF with reasonable fees can allow you to have an even bigger impact than donating by credit card since it can save charities the 2%-4% they would otherwise pay for processing credit card donations.


What should I do if I have questions on this subject or I am not sure about how to use it well?

This strategy is best evaluated in the context of other investment and tax management strategies. Of course, as with all material on this site, this article is for informational purposes and isn’t advice. Given the complexity of the tax system and investing, it’s typically wise to consult a fiduciary financial advisor with the relevant expertise in taxation, investment, estate planning, college funding, student loan management, and other related areas. We think about these issues all the time and would be happy to connect with you about your questions–just reach out!