Don't screw up your DAF donation
Here’s how to not screw up your donor-advised fund contribution.
For the charitably inclined, December is often a popular month to give. Especially for those who are waiting for the rest of the year’s tax puzzle to fall into place before executing a tax-efficient charitable giving strategy.
Donor-advised funds (DAFs) are a commonly-used tool for tax-efficient charitable giving. Why? Because they’re an easy, low-cost way to front-load a significant charitable contribution deduction while simultaneously allowing for a desired charity to receive funds at a later time.
But be warned! There are ways contributions to donor-advised funds can go awry.
Timing. To receive the related tax deduction for 2022, the DAF contribution must clear by 12/31/22. Check with your custodian for their cut off date to process your contribution. Depending on the type of asset you’re donating, processing could takes days, weeks, or longer.
Pick the right assets. While you absolutely CAN contribute cash to a donor-advised fund, most folks are donating spicier assets such as crypto, collectibles, and publicly-traded securities. This is because donating appreciated assets will provide a tax deduction while also permanently avoid capital gains taxes on the appreciation. What assets you chose to contribute to your DAF is a function of your personal balance sheet, long-term financial plan, market outlook, cash flow needs, etc. You ABSOLUTELY need a pro to help you with selection.
Donating stock from your taxable investment account? Click the right buttons! Make sure you DONATE the stock, don’t accidentally SELL the stock. I’ve seen this happen. More than once.
Make sure the donated asset meets the long-term holding period. The charitable contribution deduction for short-term assets is cost basis - generally a lower number than the fair market value deduction for long-term assets.
Income limitations. The charitable contribution deduction for appreciated non-cash assets is typically limited to 30% of Adjusted Gross Income (AGI). Amounts over the limit DO carry forward - but not indefinitely and potentially to a year for which the deduction isn’t as valuable. Here’s another moment to be working with a pro.
Assets underwater? Be careful about donating them to your donor-advised fund. It will likely make more sense to sell your position, capture the resulting tax loss for yourself, and donate the cash from the sale.
Donor-advised funds are a great tool to help you meet your philanthropic goals in a tax-efficient way. Use them strategically & carefully and they could save you significant tax dollars.