Donor funds are a versatile and quick technique to make charitable donations.
Your motivation to each make charitable donations and make smart tax planning decisions led you to establish a donor-given fund (DAF), which can now be crammed with money. DAF donations (also called “grants”) have turn out to be a crucial source of cash for charities and other nonprofit organizations.
How DAFs work, their tax advantages for you, and the timing flexibility they provide for financial contributions are discussed intimately elsewhere online. This article addresses the difficult part that is commonly not talked about: How do you choose when it makes more financial sense to present directly with the DAF quite than by bank card, check, stock, or Venmo?
Tremendous growth in DAF assets
Assets in DAFs have grown significantly. According to a report from the National Philanthropic Trust, DAFs now hold nearly $230 billion in 2 million accounts. The publication The Chronicle of Philanthropy revealed that these to shed extra pounds DAFs are changing giving in some ways – although not all of them are positive, as in a single Article out of The Boston Globe.
Example of huge DAF donations and growth
The Pan-Mass Challenge (PMC), a cycling event held every summer in Massachusetts since 1980, now raises extra money for charity than some other single sporting event on the planet. The PMC bike fundraiser for Boston’s Dana-Farber Cancer Institute will reach $1 billion in donations this 12 months with its 2024 event, which can happen the primary weekend in August. With DAF donations increasing 25% through May 31, 2024, over 60% of PMC’s fundraising growth this 12 months is on account of DAF donations, based on Michele Sommer, PMC CFO.
Notice: This summer might be my thirty sixth 12 months in a row And my wife’s thirty third 12 months to drive by and collect donations for the PMC.
New tools have been developed to make obtaining grants from DAFs faster and easier than ever before. These include DAFpaythat may be embedded in online donation forms. It allows donors to select from an inventory of DAF sponsors to contribute to. I tested DAFpay with a donation to my son’s upcoming first PMC ride. It required fewer keystrokes than entering my bank card information and was as easy as using PayPal.
Quick tax overview of DAFs
When you make a donation to a DAF, that quantity is eligible for the charitable deduction in your tax return without you having to pick out the nonprofits receiving the funds at the moment (or perhaps in any respect). If you make a really large money donation to a DAF (or on to a charity), remember that the tax deduction is capped at 60% of your adjusted gross income (AGI) per 12 months, and you possibly can carry forward the unused amount on that 12 months’s tax return for five years.
A DAF donation reduces your taxable income for the 12 months. Therefore, depending in your tax bracket, the DAF donation can reduce your taxes, provided the overall of your itemized deductions on Schedule A of your Form 1040 tax return (including charitable donations) is larger than the annual standard deduction everyone receives. (In 2024, the usual deduction is $14,600 for singles and married couples filing individually and $29,200 for married couples filing jointly.)
Related strategies that financial advisors suggest include using a DAF to consolidate or Bundle donations in a 12 months to maximise your itemized deductions. DAF donations are also an efficient tax planning strategy in years when you might have a big increase in income that might otherwise push you into the next tax bracket. Common causes of a rise in income include a vesting of Restricted Stock Units (RSUs) out of your employer, a Roth IRA conversion, or a sale of your corporation.
Basic DAF gift rules
Donations to DAFs are irrevocable. While the cash invested in your DAF account grows tax-free, chances are you’ll not withdraw funds from the DAF for private use.
However, a DAF doesn’t put any legal pressure on you to make grants from it. Unlike private foundations, that are required by IRS rules to distribute 5% of their net asset value per 12 months, you might have no legal requirement to make donations from a DAF. Private foundations may count DAF contributions toward the 5% of net assets they have to distribute annually, and so they can Convert to a DAF within the context of a legal proceeding – one reason for the big growth of DAF assets.
The lack of a minimum withdrawal rule at DAF has its criticismHowever, the IRS and Congress have shown little interest in mandating mandatory contributions from DAFs.
Although you aren’t legally required to make grants out of your DAF, some DAF providers or sponsors—comparable to Fidelity Charitable, Vanguard Charitable, Schwab Charitable (now DAFgiving360), and National Philanthropic Trust—have minimum requirements for recurring grants.
For example, the principles my DAF with Fidelity Charitable (a former client of my firm), you could make a donation no less than every two years. Otherwise, Fidelity Charitable will donate 5% of the assets in your donation account. After the primary 12 months of inactivity, Fidelity Charitable will contact the account holder to request donation recommendations.
Let’s take a look at seven the explanation why it’s best to use your DAF to make grants to charities and other nonprofit organizations.
1. Commitment to charitable causes
You probably arrange your DAF primarily since you’re generous and charitable, not only for tax reasons, so that you now have to hold yourself accountable for using the funds properly. After you’ve got given money to the DAF, it’s best to deal with how much of it you give and to which charities.
“You’ve already made your personal budget and tax decisions about how much to contribute to your DAF,” explains Mitch Stein, chief strategy officer at Chariot, the corporate behind DAFpay. “Now it’s time to experience the joy of giving and focus on how you want to use the funds in your DAF for causes or organizations you believe in.”
“Giving from your DAF allows you to support the organizations you care about with money already set aside for charity without impacting your cash or credit card payments,” emphasizes Karyn DeMartini, VP of Principal & Planned Giving on the March of Dimes.
The great amount of unapproved funds in DAFs may be frustrating for nonprofits in need of funding. 2024 National Study on Donor Funds found that 22% of DAF accounts didn’t make any grants within the last three years. In a mean 12 months during this era, 37% made no grants and the median payout for all DAF accounts was 9% (15% after removing inactive accounts).
To encourage you to make DAF grants, a company called #HalfMyDAF offers matching funds to donors who commit to spending no less than half of their DAF account every year. website has the small print on the method and deadlines for doubling donations.
Jennifer Risher (Author, speaker and former Microsoft product manager) and her husband David Risher (the present CEO of Lyft) founded the #HalfMyDAF matching program. “We created the #HalfMyDAF matching program to inspire donors to use their money now, when it can make the most difference,” says Ms. Risher. “Together with our partners, we have transferred over $58 million from DAFs to nonprofits over the past four years.”
2. Better organization and tracking
If you make a whole lot of donations in a 12 months, whether small or large, it might be difficult to maintain track of all of the recipients and avoid duplication. To assist you organize your donations, most DAF providers have a web site dashboard where you possibly can see all of the gifts you’ve got made in a single place.
3. No bank card fees
When you donate with a DAF as a substitute of a bank card, you save the nonprofit between 3% and 5% of the overall fees charged by their bank card processor (unless you increase your donation). Venmo also has feesalthough they’re lower.
4. Maximum tax-deductible donations
Donations out of your DAF aren’t tax deductible, as could be the case should you donated on to a charity by bank card, check, or Venmo. You already received the tax deduction whenever you contributed to the DAF.
If you already know you’ll meet your annual goal for tax-deductible giving—perhaps by contributing extra money to your DAF, making one other large direct gift to a charity, or establishing a charitable foundation—then make the gift through the DAF.
5. Smoother for stocks or complex assets
DAFs can handle and liquidate stocks and other assets more quickly and efficiently than many nonprofits. Let’s say you own low-tax-basis stock in Nvidia, Apple, Alphabet (i.e. Google), or Tesla that you obtain years ago and whose value has skyrocketed since then. You will want to donate the stock, since selling it will incur significant capital gains taxes.
You can donate the stock to the DAF for the Tax deduction at the present stock price after which use the funds within the DAF to make the donation. For donations of appreciating stocks that you’ve got held long-term, the tax deduction is proscribed to 30% of your adjusted gross income (AGI) per 12 months, but you possibly can carry forward the unused portion in your tax return for five years.
6. Attention and preferential treatment…
If you employ a DAF and the charity knows the donor behind it, the donation signals that you simply are a valued philanthropist who’s pleased to present to the organization’s cause. This can result in special invitations and a focus.
7. …Or complete anonymity
Grants out of your DAF can go to any qualified charity within the United States or abroad. You can arrange the DAF with any name and title you wish, and you possibly can normally change them at any time by simply submitting a form. Grants from the DAF can subsequently be anonymous, or no less than not related to you personally.
If you might be concerned that the charity you might be donating to could also be perceived as controversial by some people or your employer, the DAF may also help conceal your identity. It may prevent the charity from sharing your personal contact details with other charities. The lack of transparency in DAFs is one other area where possible changes within the lawalthough that is unlikely within the near future.
