Donor Advised Funds: 5 Big Tax Benefits

Did you know there are big tax benefits if you make your charitable contributions through a donor advised fund? For example:

  1. Not only do you get an immediate tax deduction (for giving to charity), but

  2. You can contribute shares of a stock that has appreciated over the years, and totally avoid paying capital gains taxes. Yahtzee!

  3. You can take your sweet time (years and years) deciding which charities to grant money to (and how much), even though you already get the tax deduction right away.

  4. You don’t even have to pay taxes on dividends and interest income while it sits in the fund. This is a big advantage over if you just held the investments yourself (until you decided where to donate).

  5. The donor advised fund can diversify your stock-specific risks away without triggering capital gains taxes (you can’t do this on your own).

Of course, there are RISKS. Here are 4:

  1. Once you contribute to a donor advised fund, it’s final. You’re not getting that money back.

  2. Fees on top of fees. The companies running donor advised funds can charge a 0.60% administrative fee on top of the 1.00% fee they charge on the underlying funds they invest you in—be careful!

  3. There are contribution limits relative to your adjusted income. For example, 30% on securities you contribute (depending on the year and the mood of Congress ;)

  4. There is a small chance you won’t be able to grant money to the organizations you want. Grants are limited to IRS-qualified public charities (which is a pretty wide net, generally).

The Bottom Line:

You don’t have to set up the next “Bill and Melinda Gates Foundation” to get special tax benefits for your charitable donations. There is no minimum account size for many Donor Advised Funds, and you’re often allowed to grant money to charities in denominations as small as $50. So if you’re feeling charitable—consider a donor advised fund.