Tax Implications of a Donor Advised Fund

If you are thinking about setting up a donor advised fund (DAF), it’s important to understand the tax implications. While DAFs offer many benefits, there are also some potential drawbacks to consider.

Tax Deductions from Charitable Giving

The biggest benefit of a DAF is the tax deduction you’ll receive for your charitable contributions. When you contribute cash or assets to your DAF, you can deduct them on your federal income taxes. The deduction is usually equal to the fair market value of the donated property.

However, there are some limitations on the deduction. For example, if you donate appreciated stock or other assets that have gone up in value, you can only deduct the original cost basis of those assets. So, if you bought stock for $1,000 and it’s now worth $5,000, you can only deduct $1,000 on your taxes.

To claim the deduction, you’ll need to itemize your deductions on Schedule A of your tax return. And, there are limits on how much you can deduct in a given year. For example, for tax years 2018 and 2019, the limit is 60% of your adjusted gross income (AGI).

Taxes On DAF Distributions

When you make a distribution from your DAF to a qualifying charity, the distribution is usually tax-free. However, there are some exceptions. For example, if you distribute appreciated assets from your DAF, you may have to pay capital gains taxes on the appreciation.

Another exception is if you receive any benefits in return for your distribution. For example, if you make a donation to a charity in exchange for tickets to an event, the value of the tickets will be considered taxable income.

The bottom line is that you’ll need to pay attention to the tax implications of your DAF distributions. With some careful planning, you can minimize your taxes and maximize the benefits of your DAF.

Is a DAF Right for You?

DAFs can be a great way to support your favorite charities and receive tax deductions for your contributions. But, they’re not right for everyone. Before you set up a DAF, it’s important to talk to a financial advisor or tax professional to see if it makes sense for your financial and tax situation. Find out if a DAF is right for your financial situation by speaking with a DAF advisor like Crewe Foundation, Fidelity or another firm.

How to Get Started with a DAF

If you’re interested in setting up a DAF, the first step is to find a sponsoring organization. There are many organizations that sponsor DAFs, including community foundations, financial institutions, and brokerages.

Once you’ve found a sponsoring organization, you’ll need to open an account and make an initial contribution. The minimum contribution required will vary depending on the organization. For example, Fidelity Charitable requires a minimum initial contribution of $5,000.

Other Considerations

When you set up a DAF, you’ll need to name a successor advisor. This is the person who will take over as advisor if you can no longer serve in that role. You’ll also need to decide how your assets will be invested and how they will be distributed when you make a distribution from your DAF.

It’s important to consider these factors carefully before setting up a DAF. Once the account is established, it can be difficult to make changes.

The bottom line is that DAFs can be a great way to support your favorite charities while receiving tax benefits for your contributions. But, there are some things to consider before you get started.

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