Donor Advised Funds Explained: A Practical Guide to Tax-Efficient Charitable Giving

Donor Advised Funds: A smart tax strategy

In my last post, I spoke about a great tax strategy for charitable giving called a Qualified Charitable Distribution, or QCD.  QCDs allow you to lower your Adjusted Gross Income (AGI) dollar for dollar and still take advantage of the standard deduction (or itemize if it makes sense) for further reduction of your tax bill.  The main problem with the QCD strategy is that it is available to a relatively small demographic:  charitably minded individuals at least 70 1/2 years old with money available in a traditional IRA. 

Today I want to talk about a more widely available method to use your charitable gifts to save on taxes.  It is by gifting through a Donor Advised Fund, or DAF. 

What is a Donor Advised Fund?

These are accounts that are available at most of the large brokerages such as Fidelity, Schwab, or Vanguard, or through private companies that specialized in them.  Some large charities have even created their own. 

You can think of it as a holding account for your future charitable gifts.  In other words, you donate to the fund, either in cash or with in-kind transfers of securities such as stocks, bonds, mutual funds, ETFs, etc. Then, at some future date, you indicate for the fund to send a donation to a qualified charitable organization.  You say how much, give the name of the charity, and the DAF managers take care of the rest.  In practice, it is simpler than writing checks to multiple charities yourself.

How does the tax deduction work?

Donating to your donor advised fund is counted as an irrevocable gift.  It is the timing of that donation when you count it against your taxes, not when the DAF later gives to the charity.  So, if you transfer 100 shares of NVDA to your DAF in December of 2025, your deduction is counted on your 2025 tax form as an itemized deduction. If you later instruct the DAF to send a check to the United Way on January 25, 2026, that is irrelevant to your taxes. The "gift" has already been made.

What are the deductible limits for charitable contributions?

Many people may not know that although you can contribute as much as you want to charity, there are limits on how much of that contribution might be tax-deductible.  And the limits differ depending on the kind of charity and the type of contribution. 

Here are the rules:

1. For cash donations, you can contribute up to 60% of your AGI.

2. For in-kind donations of securities, you can contribute up to 30% of your AGI.

3. You can carry forward a large deduction (one that exceeds the above limits) for 5 future years.  In other words, if you make a large contribution in year 1 that exceeds your AGI limit, the deduction is not lost.  You just apply the remainder to the next tax year (or more gradually over up to five future years).

Example: Suppose your AGI is $200,000 and you donate $100,000 of appreciated stock to a Donor Advised Fund. Since appreciated securities are limited to 30% of AGI, you can deduct $60,000 that year. The remaining $40,000 can be carried forward and deducted over the next five years, as long as you have enough income and itemized deductions to use it.

This feature makes Donor Advised Funds especially useful for:

·       High-income years

·       Practice sales or business windfalls

·       Large stock positions with significant gains

·       Estate or inheritance planning

·       One-time charitable campaigns

4. Donating to private charities, such as family foundations, have a different set of rules and lower AGI limits

   ·       Cash to private foundations → 30% of AGI

   ·       Appreciated assets → 20% of AGI

   
   

5. Remember that DAF accounts can only be used to fund recognized public charities.  Here are some of the other places where DAF money cannot be used:

   ·       Individuals

·      Political organizations

·      GoFundMe

·      Tuition payments

·      Donor benefits (tickets, dinners, memberships)

How can using a DAF save you on your tax bill?

1.        Donating appreciated stock:  If you have stocks that have been sitting in a taxable account and you haven’t wanted to sell them because of the capital gains tax, you can donate the stock in-kind to the DAF.  When you do so, you do not pay taxes on the gains.  If the stock has been held for more than one year, the full fair market value counts as your charitable deduction. Because the DAF and the receiving charity are tax-exempt, the embedded capital gains are never taxed.  It’s a win-win.  You get full deductible credit for your contribution, and you never had to pay taxes on the gains.

2.       Bundling your charitable contributions:  You may be in a situation where itemizing your deductions does not make sense because the standard deduction is higher.  Therefore, your charitable gifts provide you no tax-advantage.  However, if you bundle the amount of gifts into one year that you normally spread out over several years and then itemize that gift, it might push you over the standard deduction and save on your tax bill.  Putting that larger donation into a DAF allows you to still distribute it to the charity in a more predictable way and still provide them with the steady stream of income that they rely on.

3.       Money in your DAF account can appreciate.  Once you make a gift to your DAF account, whether in cash or in stocks, the money can be reinvested in a variety of options, not unlike a 529 account or a 401k.  The money in the account should continue to grow for as long as it is in there.  So, in theory, you could donate $10,000 and take the tax break in the year that it makes sense for you and then donate it to your charity a few years later when it is worth $12,000.  Your original gift turned into an even larger gift over time. 

Is it complicated to set one up or manage it?

The answer is no.  I just created one for myself this past year and it is way easier than I expected.  I just opened the account through Fidelity, named it the Jepson Family Charitable fund and transferred some stocks from my taxable account into the DAF.  Then, whenever I am ready to give to charity, I select “make a contribution”, designate the qualified charity, and press done.  When the account starts to drop too low, I transfer more into it.  Easy.  I now always donate appreciated stock and save the cash in my bank account for other things.

What Do I Need to Know About Recordkeeping and Documentation?

Even though Donor Advised Funds make charitable giving simple, the IRS still requires proper documentation to support your charitable deduction. This is especially important when donating appreciated assets rather than cash.

1. Keep the acknowledgment letter from your DAF sponsor

When you contribute to your Donor Advised Fund, the sponsoring organization (such as Fidelity Charitable or Schwab Charitable) will provide a written acknowledgment of your gift. This letter typically includes:

• The date of the contribution

• A description of the assets donated

• A statement confirming that no goods or services were received in exchange for the gift. This acknowledgment is required for both cash and non-cash donations. Without it, your charitable deduction could be disallowed.

2. Additional IRS forms for non-cash contributions

If you donate assets other than cash, additional reporting may be required:

• With non-cash donations over $500, you must complete IRS Form 8283 and attach it to your tax return.

• With non-cash donations over $5,000 involving non-publicly traded assets, a qualified appraisal is required, and the donation must typically be approved in advance by the Donor Advised Fund sponsor. (Publicly traded securities do not require a qualified appraisal but still require Form 8283 if total non-cash donations exceed $500.)

  
  

Examples of assets that may require a qualified appraisal include:

• Closely held business interests

• Real estate

• Private equity or limited partnership interests

• Cryptocurrency in some cases (Cryptocurrency is treated as property by the IRS and generally requires a qualified appraisal for larger gifts.)

3. Fair market value and valuation records

For publicly traded securities (such as stocks, ETFs, and mutual funds), most Donor Advised Fund sponsors automatically calculate and record the fair market value of your contribution on the date of transfer and provide this information in your contribution history and acknowledgment letter. These records are typically easy to retrieve online.

For non-publicly traded assets, maintaining separate valuation documentation becomes much more important due to appraisal requirements and the higher level of IRS scrutiny.

4. Retain records for at least five years

Because charitable deductions can be carried forward for up to five years, it is wise to retain documentation for several tax years in case verification is needed later. While your Donor Advised Fund account will usually keep a searchable history of your transactions, it is still a good practice to maintain your own copies of key documents, including:

• DAF acknowledgment letters

• IRS Form 8283

• Qualified appraisals (if applicable)

• Brokerage transfer confirmations

• Grant history from the DAF

A simple digital folder labeled “Charitable Contributions – 2025” (and updated annually) can prevent unnecessary stress if questions ever arise.

 

Some things to remember

1. DAFs are not free.  They charge an administrative fee, often around 0.6-1%, to invest your money and to distribute it to the charities when you choose.  This is on top of the expense ratios of the funds where you invest your DAF accounts.

   
   

2. Investment options may be limited.  When you donate your stock, it does not carry on as the stock but is reinvested according to the funds that you choose which may underperform your original investment.

   
   

3. Gifts are irreversible.  Once you give to the DAF, you cannot take it back.  It is now effectively owned by a charity (the DAF) whose job it is to distribute to other charities.

   
   

Bottom-line

The government encourages donations to qualified charities by giving tax incentives to individual taxpayers who do so.  However, many times those charitable gifts are not actually helping us on taxes in the way that they could be, either because they are not large enough to make sense to itemize or you are liquidating a taxable asset to generate the cash to give to the charity.  Donor advised funds help to solve a few of those problems and they are relatively easy to manage. 

Who are good candidates for a DAF?

• High-income professionals

• Those with appreciated brokerage assets

• People with irregular income (bonuses, practice sale, stock windfall)

• Charitably inclined but unsure where to give yet

• Those near retirement tax cliffs (IRMAA, NIIT)

If you fit anywhere on that list, you should definitely add it to your arsenal of effective tax savings strategies.   If you would like help understanding how this can fit into your overall financial plan, please reach out to us at www.targetedwealthsolutions.com.

Disclaimer: the material in this blog post is intended for general educational purposes only and should not be considered specific financial advice. You should always consult with your personal financial advisor to see how it might fit within your personalized financial plan.