As the joyful festivities of Christmas give way to the start of a new year, another far-less enjoyable season looms on the horizon – tax season. For many individuals and families, this time of year can bring a sense of urgency to optimize deductions to reduce next year’s tax bill. Enter donor-advised funds (DAFs), a financial tool that can be particularly useful in maximizing the tax benefits of your household’s giving. DAFs are a giving account that is established by a donor with a charitable organization. The donor receives a charitable deduction for the full amount of the gift and recommends grants from the fund to other charitable organizations of their choice.

To fully grasp the tax benefits of a donor-advised fund, it is important to understand the standard deduction. The standard deduction is a fixed amount that taxpayers can subtract from their taxable income, reducing the amount of income subject to taxation. However, if taxpayers have itemized deductions (including charitable giving) exceeding the standard deduction, the IRS allows them to use that amount instead. Since the passage of the Tax Cuts and Jobs Act in 2017, standard deduction limits have increased significantly. For tax year 2023, the standard deduction is $13,850 for single individuals and $27,700 for married couples filing jointly. This change simplified tax filing for many but also limited the ability to claim charitable giving deductions for many households. This is where Donor Advised Funds come in. Here’s how they work:

• Bunching Contributions: DAFs allow donors to frontload their contributions. This means you could contribute multiple years of tithing or charitable gifts to a DAF in one year to bring your itemized deductions in excess of the standard deduction threshold. Then, you could recommend grants from the DAF on an annual basis at a rate you see fit. For example, imagine you’re a married couple with a standard deduction limit of $27,700, with itemized deductions outside of charitable giving of $15,000. In most years, you plan to tithe $10,000 to your local church. This would bring your total itemized deductions to $25,000, meaning you would not receive any additional tax benefits for your charitable gifts. However, by bunching two years of tithing and contributing to a donor-advised fund, you can take the full $20,000 contribution in one year. This means that for that particular tax year, you would be able to effectively reduce your taxable income by an additional $7,300 more than if you tithed over two years.
• Donating Appreciated Assets: You can donate cash or stocks to a DAF, the latter of which presents another tax-planning opportunity. When donating appreciated stocks to a DAF, the donor receives the full Fair Market Value of the donated asset as a tax deduction, without having to recognize the capital gain. Reducing gains and maximizing deductions is the name of the game in tax planning.
• Tax-Free Growth Potential: DAFs at BFCal are invested in our common investment funds, which means the assets within your fund can potentially grow tax-free over time. This growth can lead to more funds available for charitable giving in future years.

Donor-advised funds offer a valuable tax planning opportunity for individuals and families, especially when they are near or just below the standard deduction limits. In addition to providing a flexible and tax-efficient way to manage giving, DAFs also present a unique opportunity to get children or grandchildren involved in the giving process. By involving the whole family in the charity selection process, you can get kids to think through the causes they are passionate about and demonstrate the importance of giving to others that Christ calls us to exemplify.