Complete Guide to Donor-Advised Funds
Donor-advised funds (DAFs) are a type of charitable giving vehicle that allow individuals, families, and organizations to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to charitable organizations over time.
DAFs have grown in popularity in recent years as a way for donors to simplify their charitable giving and make a greater impact.
While DAFs were previously only available to the wealthy, Groundswell makes the benefits of a donor-advised fund accessible to everyone.
In this article, we provide a complete guide to donor-advised funds, including how they work, their benefits and drawbacks, and how to set one up.
How do donor-advised funds work?
When a donor makes a contribution to a DAF, the funds are invested and managed by a sponsoring organization.
The donor receives an immediate tax deduction for the contribution, and can then recommend grants to charitable organizations at any time. The sponsoring organization is responsible for managing the DAF and distributing the grants as directed by the donor.
One of the main benefits of DAFs is that they allow donors to make a charitable contribution and receive an immediate tax deduction, even if they are not ready to decide which charities to support.
This can be especially useful for donors who want to make a charitable gift but are not sure which organizations to support, or for donors who want to spread their charitable giving out over time.
Learn the difference between a private foundation and a donor-advised fund
Benefits of donor-advised funds
There are several benefits to using a DAF for charitable giving, including:
Simplicity: DAFs are a simple way to make charitable contributions, as donors can make a single contribution to the DAF and then recommend grants to multiple charities over time.
Immediate Tax Deduction: Donors can receive an immediate tax deduction for their contribution to a DAF, even if they are not ready to recommend grants to charitable organizations.
Professional Management: DAFs are managed by a sponsoring organization, which means that donors do not have to worry about managing the investment of the funds or distributing the grants.
Flexibility: Donors can recommend grants to any IRS-qualified charitable organization, and can change the organizations they support at any time.
Anonymity: Donors can remain anonymous when making a contribution to a DAF or recommending a grant, if they choose.
How to set up a donor-advised fund
Setting up a donor-advised fund (DAF) is a simple process that can typically be done online in a few easy steps:
Choose a sponsoring organization: There are many different organizations that sponsor DAFs, including community foundations, financial institutions, and charitable organizations. Choosing a reputable organization that aligns with the donor’s charitable goals is important.
Groundswell is a flexible choice for small to enterprise-sized businesses looking to provide a charitable giving platform for their employees.
Learn to open a DAF account with Groundswell.
Make a contribution: The donor can make a contribution to the DAF using cash, securities, or other assets. The donor will receive an immediate tax deduction for the contribution.
Recommend grants: The donor can recommend grants to charitable organizations at any time, either online or by contacting the sponsoring organization.
Monitor the DAF: The donor can monitor the activity of their DAF and recommend additional grants as desired.
Donor-advised fund tax deduction information
One of the main benefits of donor-advised funds (DAFs) is that they allow donors to receive an immediate tax deduction for their charitable contributions. The tax deduction for DAFs is generally the same as it would be for a charitable contribution made directly to a charitable organization.
To be eligible for a tax deduction, the donor must itemize their deductions on their tax return and the contribution must be made to a qualified charitable organization. Contributions to a DAF are tax-deductible in the year that they are made, even if the donor does not recommend any grants from the DAF until a later year.
It is important for donors to keep in mind that there are limits on the number of charitable contributions that can be deducted each year.
Limits for charitable contributions that can be deducted for the tax year 2022
The limits on the number of charitable contributions that can be deducted for the tax year 2022 depending on the type of organization to which the donation is made and the taxpayer’s filing status.
For the tax year 2022, the limits are:
For donations made to public charities and certain private foundations, the limit is generally 60% of the taxpayer’s adjusted gross income (AGI).
For donations of appreciated capital gain property made to public charities and certain private foundations, the limit is generally 30% of AGI.
For donations made to certain private foundations and veterans organizations, the limit is generally 30% of AGI.
For donations of appreciated capital gain property made to certain private foundations, the limit is generally 20% of AGI.
It’s always recommended to check with a tax professional or the IRS to confirm the limits that apply to your specific situation.
It is also important for donors to retain documentation of their contributions to a DAF, as they may be required to provide proof of their charitable contributions in the event of an audit.
Software like Groundswell keeps track of all the important information you need come tax time.
Donor-advised funds distribution rules
The distribution rules for donor-advised funds vary depending on the specific terms of the fund and the sponsoring organization. In general, however, the following rules apply:
- Donors must make an irrevocable contribution to the fund in order to participate. This means that the donor cannot change their mind and take the money back after making the contribution.
- Donors can recommend how their contributions are invested and how the earnings are distributed to charitable organizations, but the sponsoring organization ultimately has the discretion to approve or deny the recommendations.
- Donors cannot receive any personal benefit from the fund, such as the use of donated assets for personal purposes or the receipt of goods or services in exchange for their contribution.
- Distributions from donor-advised funds must be used for charitable purposes. This means that the funds must be used to benefit a charitable organization or to support a charitable program.
- Donors must follow all applicable federal and state laws, including laws related to self-dealing and excess benefit transactions.
- Sponsoring organizations may have additional rules and requirements for donor-advised funds, such as minimum contribution amounts or distribution frequencies. It is important for donors to understand and comply with these rules in order to maintain the tax-advantaged status of their contributions.
How Groundswell uses the DAF to enable corporate giving programs.
Groundswell is a corporate giving platform revolutionizing access to DAFs.
Donor-advised funds power Groundswell accounts. Groundswell’s DAF infrastructure gives companies and their employees a better, smoother experience when compared with traditional workplace giving programs.
With Groundswell, companies can deposit gifts directly into their employees’ accounts.
Groundswell’s infrastructure also enables privacy and security for employees and employers. Since charitable giving can be deeply personal, adding a level of privacy aids in fostering a corporate culture of generosity and giving.
Learn more about setting up a corporate giving program and DAF with Groundswell.
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