Earn Taxes

Know Your Tax Terms: What Is A Donor-Advised Fund, And How Does It Benefit You?

Maggie Klokkenga, CPA, CFP®  |  January 26, 2024

A donor-advised fund (DAF) is a 501(c)(3) charity to which you can make charitable contributions and receive a tax deduction that year.

A donor-advised fund (DAF) is a 501(c)(3) public charity to which you can make charitable contributions and receive a tax deduction in that same year. Once the money (or stock, real estate and even other types of appreciated items, like artwork) has been donated to the fund, it will be invested with the goal of growing for the future.  Then, at your discretion, you can make gifts (called grants) to charities from your account.

There are many reputable DAFs, some with larger financial institutions like Vanguard, Fidelity and Schwab. There also may be some offered in your local area through a community foundation. There is usually a minimum amount to open a DAF and possibly a minimum balance to maintain. Typically, administrative costs are low.  But read the fine print for a specific DAF before making your initial contribution.

Contributing to a donor-advised fund can be beneficial to your taxes in that it can help you itemize—even if you do it in alternate years or even sporadically (a strategy called “lumping and clumping.”) But it can also be helpful in that you can contribute money to your charities from the fund even in the years you don’t itemize—allowing you to smooth out your giving. For example, you contribute $15,000 to a DAF in 2022, but you grant $5,000 to your favorite charity in 2022, 2023 and 2024.

And, by donating things other than cash, you can benefit further. Donating stock with a low purchase price, for example, and you not only get the itemized deduction equal to the fair market value of the stock (up to 30% of your adjusted gross income), but also avoid paying any capital gain taxes since you’re not selling the stock (the DAF is). Note: You must have held the stock for at least 12 months.


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