Donor-Advised Fund (DAF)

A Donor-Advised Fund (DAF) is a charitable giving vehicle. You contribute cash or securities to the DAF, take the deduction in the year of contribution, and direct grants to qualifying 501(c)(3) charities over future years.

Why DAFs matter

Three key advantages:

• Bunching deductions: contribute multiple years of giving at once to clear the standard deduction threshold, then take the standard deduction in off years
• Donate appreciated securities: avoid capital gains tax AND get fair-market-value deduction. Effectively, the IRS subsidizes a portion of your gift.
• Time-shift the giving: contribute today, decide which charities to support later

The math

For a household in the 32% federal bracket with $50K of long-term-appreciated stock (cost basis $10K) donated to a DAF:

• Capital gains tax avoided: $40K × ~23.8% (LTCG + NIIT) = ~$9,500
• Itemized deduction: $50K × 32% = $16,000
• Total tax benefit: ~$25,500 (a 51% effective subsidy on the gift)

Compared to direct charitable giving

A direct check to a charity gets you the deduction but doesn't avoid the capital gains. Donating appreciated stock directly to a charity is equivalent — but the DAF adds the ability to time-shift the actual grants.

Bunching strategy

A typical "bunching" pattern: every 3 years, contribute 3 years of intended giving to the DAF. In year 1, itemize and take the large deduction. In years 2-3, take the standard deduction. Grant from the DAF in all three years.

Limits

Charitable deductions are capped at:

• 30% of AGI for appreciated long-term securities to a public charity (including DAFs)
• 60% of AGI for cash to a public charity
• Excess can be carried forward 5 years