Donor Advised Fund Deduction: How It Works

A donor-advised fund (DAF) is a charitable giving account established at a public charity that sponsors the fund. This structure allows you to make a contribution, receive an immediate tax deduction, and then recommend grants from that account to qualified charities over time. The primary function of a DAF is to separate the timing of your tax deduction from the eventual distribution of funds. The assets within the DAF can be invested to grow tax-free, potentially increasing the amount available for future charitable grants.

Contribution Types and Deduction Valuation

The type of asset you contribute to a donor-advised fund impacts how your deduction is valued. For contributions of cash, which can be made by check, wire transfer, or other electronic means, the process is straightforward. The value of your deduction is the dollar amount of cash you contribute to the fund.

The valuation is more detailed for non-cash contributions, such as publicly traded securities like stocks and bonds. When you donate these assets held for more than one year, the deduction is based on the fair market value (FMV) on the date of the contribution. The FMV is determined by the average of the high and low trading prices on that day.

A significant benefit of donating appreciated securities is the potential to avoid capital gains tax. If you sold the stock yourself, you would owe tax on its increase in value. By donating the stock directly, you can eliminate this tax liability while still claiming a deduction for its full fair market value. Other non-cash assets, such as real estate or interests in a privately held business, can also be contributed, though their valuation is more complex and often requires a qualified appraisal.

Annual Deduction Limits

The Internal Revenue Service places limits on charitable deductions based on your adjusted gross income (AGI). For cash contributions to a DAF, you can deduct an amount up to 60% of your AGI for the year.

The rules differ for contributions of non-cash assets like appreciated stocks held for more than one year. For these contributions, the deduction is limited to 30% of your AGI. For example, if your AGI is $200,000, your deduction for donated stock is capped at $60,000 for that year.

If your contributions exceed these AGI limits, the excess deduction is not lost. The tax code allows you to carry over the unused portion of the deduction for up to five subsequent tax years. This carryover provision provides flexibility, allowing individuals who make a large contribution to spread the tax benefit over several years.

Required Documentation and Substantiation

To claim a deduction for a contribution to a DAF, you must have specific records. For any single contribution of $250 or more, you must obtain a contemporaneous written acknowledgment from the DAF’s sponsoring organization. This formal receipt must state the amount of cash contributed or provide a description of the non-cash property.

The letter must also include a statement confirming whether you received any goods or services in exchange for your contribution. If you did, the acknowledgment must provide a good-faith estimate of their value, as you can only deduct the amount of your contribution that exceeds that value. “Contemporaneous” means you must receive this acknowledgment by the earlier of the date you file your tax return or its due date.

For non-cash contributions with a total value exceeding $500, you must complete and file IRS Form 8283, “Noncash Charitable Contributions.” This form requires details about the donated property, the charity, the contribution date, and how you acquired it. If the value of a single non-cash item or a group of similar items is more than $5,000, you must also obtain a qualified appraisal. An appraisal summary, found in Section B of Form 8283, must be completed and signed by the appraiser and an official of the DAF.

Claiming the Deduction on Your Tax Return

Once you have determined the value of your contribution, confirmed it is within the annual limits, and gathered all documentation, you can claim the deduction on your tax return. To do so, you must itemize your deductions using Schedule A (Form 1040). The total amount of your charitable contributions is entered on the “Gifts to Charity” line.

If your non-cash contributions for the year total more than $500, you must attach the completed Form 8283 to your federal income tax return. If your donation required a qualified appraisal, the appraisal summary portion of Form 8283 must be completed and attached as well.

After filing, keep all related records with your tax documents. These documents serve as your proof should the IRS have any questions about your charitable deduction.