Donor-advised funds (DAFs) offer a convenient way for donors to take a tax deduction for the charitable donations they make today while buying them time to decide which charities are worthy of those donations later. The funds donated are held in investment accounts operated by nonprofit community foundations like the National Philanthropic Trust (the Trust), or the charitable arms of large financial services firms such as Fidelity Charitable, Schwab Charitable, Vanguard Charitable, and many others.
Tips For Using Donor-Advised Funds Responsibly
While there is room for improvement with respect to how DAFs are regulated, donor-advised funds can be a win-win for donors and charities when used responsibly. CharityWatch offers the following tips for doing just that.
Tip 1: Do your research before giving
Just as it is not good to let funds languish in DAFs for years before distributing them to charities that can put them to good use, donating impulsively is also a bad strategy for maximizing the impact of your donations. View A+ to F charity ratings, including CharityWatch’s list of Top-Rated charities, to identify efficient and responsible charities to support before donating through your donor-advised fund.
Be cautious about relying on charity ratings housed in large, online databases that may lack rigor due to relying too heavily on automation of unaudited financial data, or on crowdsourcing flattering information directly from the charities being rated.
Tip 2: Distribute funds in a timely manner
Once you know which charities you want to support, be mindful to not wait too long to think about the timing of how much you want to distribute and to which charities. Those dollars are not doing anything charitable until they leave the DAF and are granted to the charities of your choice.
Tip 3: Maximize your tax deduction while doing good
If you have profitable assets in a brokerage account, you may be able to bypass capital gains taxes you may otherwise owe from selling them by donating those to your donor-advised fund instead. You can generally deduct the full market value of the donated assets if you owned them for more than a year, limited to 30% of your adjusted gross income. The excess can generally be carried over for the next five tax years.
If you goal is to exceed the standard deduction by maximizing your itemized expenses in a particular tax year, consider making one large donation into your DAF in that tax year, then distributing those funds to worthy charities over the next several years. Doing so may offer better bang for your buck from a tax savings perspective than would donating the same total amount into your DAF over the next three tax years.
Donate to CharityWatch Through Your Donor-Advised Fund
As the only charity watchdog in the United States, CharityWatch relies on public support to fund our work with journalists, our research into wrongdoing in the nonprofit sector, and our charity ratings. Your donations are noticed, needed, and greatly appreciated. Use DAF Direct or your account with the financial services firm sponsoring your DAF to make a charitable donation to CharityWatch: Tax ID number 33-0491030, American Institute of Philanthropy, dba CharityWatch.