Definition
A donor-advised fund is a charitable giving account that lets a donor take an immediate tax deduction for a contribution and recommend grants to charities over time.
How It Works
The donor contributes cash or appreciated assets to the fund, takes the deduction in that year, and the assets grow tax-free until granted out to charities. Contributing appreciated stock or other assets avoids capital gains tax while still deducting fair market value.
Example
A donor in a high-income year contributes $200,000 of appreciated stock to a DAF, deducts the full value, avoids the capital gains tax, and grants the money to charities over the next several years.
When It Works Best
It works best for bunching several years of giving into one high-income year to clear the standard deduction, and for donating appreciated assets rather than cash.
Who It Applies To
Charitably inclined taxpayers, especially in a high-income or liquidity-event year.
Watch-Outs
Contributions are irrevocable, and while the donor recommends grants, the sponsoring organization has legal control. Deduction limits based on income and asset type apply.
