A donor advised fund (DAF) is a way for individuals with high incomes to give charitably, manage their overall tax strategy, and make planned gifts. You may think:
I’m not a high-income earner!
The truth is—while it is possible to have consistently high earnings that put you in a higher than desired tax bracket, it is also true that many individuals and couples have occasional years where they ‘slip into’ a higher than desired tax bracket because of one-time events: a bonus at work, a great farming year, excessive gains taxed as ordinary income, etc. If you are charitable at heart and have a significant tax burden, we should talk about the possible use of a donor advised fund.
A DAF works like this:
- You donate money to a DAF that is managed according to your desires, risk tolerance, and objective for the money
- The entire amount donated can be declared as a tax deduction (up to 50% of your income), reducing your tax burden accordingly
- The funds you have donated can be sent as “grants” to churches and 501(c)3 charities of your choice, at any time in the future.
- The ‘relief’ on your tax bill comes in the year you make the contribution to the DAF and you determine when and where you will donate the money.
- Generally, you would maintain $10K or more in the account.