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JonB · · 6 replies

I'm curious if anyone has used a Donor Advised Fund (DAF)? And if so, how are the contributions to it treated on ones taxes.

Are DAF contributions counted as an additional deduction beyond the standard deduction?

For example, we are married filing jointly. Standard decution is $31,500. If we give another $10,000 to a DAF, would that reduce our MAGI by a total of $41,500?

Thank you for any insight!

Jon

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Replies (6)

lindsay

lindsay

9 months ago

I haven't set mine up yet, but have been preparing to do so by the end of the year.

My understanding is that DAF contributions are treated like other charitable contributions, so only applicable if you itemize instead of taking the standard deduction. If you're not going to put more in the DAF than the standard deduction, it doesn't save you anything on your taxes.

Roberto Sánchez

Roberto Sánchez

9 months ago

And something else to remember is that, depending on specific circumstances, it might not be all that beneficial to contribute to a DAF as compared to itemizing.

For instance, if you set up a DAF the custodian will charge some amount to maintain the account. This is different from your typical brokerage where there isn't a fee for the account itself. So, if you have the entire DAF in VTSAX, VTI, or similar, you would pay the 0.02% (or is it 0.04%?) fund expense ratio (indirectly), but you would also pay the institution that houses the account something like 0.1% to 0.5%. It's not a lot, but it's also not nothing.

Then there's the matter of correctly calculating the tax benefit. What I mean by that is that you need to look at the tax benefit as the delta between what you would be able deduct with and without the DAF in the mix. For instance, suppose you didn't set up the DAF at all and you can take the $31,500 standard deduction for MFJ. If you set up a DAF, you can usually only deduct an amount up to 30% of your current year AGI (the rest gets carried forward to future years; I'm not sure if you "lose it if you can't itemize the next year or if it waits around until the next chance you have to itemize). So, it's not like you can donate $1M to the DAF and deduct all of it at once (unless $1M is less than 30% of your AGI).

For a notional example, consider a married couple with an AGI of $150k. The max they can put into a DAF without triggering the carry-over into a future tax year is $45k. But if they don't itemize they get a standard deduction of $31,500. That means that for them, the benefit of maxing the DAF contribution is only an additional deduction of $13,500. Odds are that with an AGI of $150k they are in the 12% bracket, so the benefit of putting $45k into the DAF works out to about a $5,400 tax savings. Now, if you also make cash gifts (which are governed by a different limit), then you could potentially improve on that (up to 50% of AGI), but of course that only makes sense if you already had plans to make gifts and you have the assets available and you want to lock them away in a DAF, or if you have a bunch of other deductions that you can stack together.

Something else to consider is that once you reach age 70.5, DAFs essentially become pointless (for most of us in the FI community). The reason for that is because you can make qualified charitable contributions (QCDs) directly from an IRA (e.g., after rolling your 401(k) over into an IRA), count the entire distribution for RMD purposes (if you are at the stage of being required to take RMDs), pay $0 taxes on the distribution, and that charitable organization also doesn't pay taxes on it. So, if you're 35 and thinking about setting up a DAF, that makes more sense than if you're 65.

Yet another thing to consider is that, IIRC, the One Big Beautiful Bill does contain some adjustments to how DAF deductions are calculated, meaning that most people will no longer be able to deduct the full deductible amount starting next year. I don't know the particulars, but I just remember reading something about it.

lindsay

lindsay

9 months ago

I haven't finalized the details (as I mentioned), but here are the peculiarities of my situation that I think make it make sense for me:

  • I'm 39 and single, no dependents.
  • I already made a donation of appreciated stock of ~$10k more than the standard deduction for single filers this year (though not 30% of my AGI), so am already expecting to itemize. (I do not, however, have SALT, because I'm a renter in NH.)
  • I'm not expecting to make similarly large donations in the future, but would still probably hit at least half the standard deduction, so it makes sense to stack my deductions this year.
  • A large chunk of my net worth is in early employee stock from a company I worked at that later went public. My shares are up ~350x since I bought them (and yes, 350x, not 350%--you don't have to win very often when you win that big!), so I have huge unrealized capital gains and negligible cost basis, and moving appreciated stock to a DAF means not having to deal with the capital gains taxes.
  • The more I can cash out in one year to diversify, the better.
  • Cashing out a chunk of cash at the end of the year would enable me to realize less income next year, leading to much higher marketplace insurance subsidies.

I'm quite sure there are things I haven't considered yet. I have this on my "beginning of Q4" project list, and today's just the first day of Q4. But I really think I'm in a situation where it makes a lot of sense this year.

brub888

brub888

9 months ago

Your notional example ignores SALT and any other itemized deductions. I expect someone who makes a significant contribution to a DAF to also have significant State And Local Taxes paid and possibly mortgage interest paid which are also included in itemized deductions. Starting in 2026, the floor for charitable contribution deductions (including DAF) is 0.5% of AGI. The SALT itemized deduction limit is $40K from 2025-2029 and phases down to $10K for MAGI over $500K. After that it reverts to $10K which was the limit for 2018-2024.

Your calculation of the std deduction does not take into account the additional senior std deduction of $2K for Singles 65+ and $3.2K for MFJ both 65+ or $1.6K for one 65+. The extra senior deduction of $2K recently passed in the OBBBA does not impact the standard deduction. For example, the std deduction for a MFJ both 65+ is $34.7K.

Roberto Sánchez

Roberto Sánchez

9 months ago

All of this is why I said "or if you have a bunch of other deductions that you can stack together". The variations are too numerous and too complex to try to tackle at all once. I was specifically trying to highlight the interaction between giving to a DAF and the $31,500 standard deduction that JonB@JonB specifically mentioned, in the post which originated the thread, as being relevant to his particular circumstance.

But, yes, you are right, there quite a few different possible factors to consider. And it gets complicated fairly quickly.

JonB

JonB

9 months ago

Thank you all for the responses.

I was suspicious that we would have to itemize DAF + taxes + other charitable contributions, etc; and they would have to exced the standard deduction.

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