A donor advised fund (DAF) is one of the simplest ways to plan your giving and get a tax break at the same time. Think of it as a savings account for charity. You put in money or assets, get a tax deduction right away, and then send grants to your favorite charities when you are ready.
How a Donor-Advised Fund Works
You open a DAF through a sponsor group. This is usually a public charity like Fidelity Charitable, Schwab Charitable, or a local foundation. Once you put in cash, stock, or other assets, the gift is final. The sponsor legally owns the funds. But you keep the right to say which charities get grants and when.
Here is why that matters. You get your tax deduction right away in the year you give, even if you do not send the money to charities until years later. The funds can be invested and grow tax free inside the account. When you are ready, you send grants to charities under Section 501 of the tax code.
Tax Benefits of a DAF
The tax perks make DAFs popular for people with giving goals:
- Income tax deduction. Cash gifts to a DAF are deductible up to 60% of your adjusted gross income. Public stock and other assets that have grown in value are deductible up to 30% of AGI.
- No capital gains tax. If you give public stock that has gone up in value, the DAF can sell it without triggering capital gains tax. The full value goes to charity. You get the tax deduction based on fair market value, not what you first paid.
- Bunching plan. Many people do not give enough in one year to beat the standard deduction. With a DAF, you can "bunch" many years of gifts into one year. You take a large deduction that year. Then you send grants to charities over the next few years.
The Arizona Charitable Tax Credit Bonus
Arizona residents have an extra perk. The state offers a tax credit for gifts to Qualifying Charitable Groups (QCOs) and Qualifying Foster Care Charitable Groups (QFCOs). These credits cut your state tax bill dollar for dollar. They work alongside your federal deduction from the DAF. So you can stack the benefits.
Note that DAF gifts do not qualify for the Arizona tax credit. The state credit applies to direct gifts to qualifying groups. But you can use both tools in the same year. Use the DAF for your federal deduction and direct gifts for the state credit.
What You Can Put In
Most DAFs accept a wide range of assets:
- Cash and checks
- Public stocks and mutual funds
- Private company stock (some sponsors)
- Real estate (select sponsors)
- Crypto (growing number of sponsors)
Giving assets that have grown in value instead of cash gives the best result. You avoid capital gains tax on the growth and still get the full fair market value as your deduction.
DAF vs. Private Foundation
A DAF is much simpler than a private foundation. There is no board to manage, no tax returns to file, and no payout rules to follow. A private foundation gives you more control but costs more to set up and run. For most people, a DAF gives the same giving power with far less hassle.
Using a DAF in Your Estate Plan
You can name your DAF as a beneficiary of your retirement account or life insurance policy. This lets you keep giving even after you pass away. Your family can also be named as successor advisors. They get to keep the giving going in your name.
A DAF is a simple, flexible, and tax-smart way to give. Clean and simple.