Thought Leadership - HORAN Wealth

Maximizing Your Charitable Impact: The Benefits of Bunching with a Donor Advised Fund (DAF)

Relocating from Europe to the United States involves so much change! A significant difference you will encounter is the approach to charitable giving.  Social safety-nets and cultural pursuits are often publicly funded in Europe.  In the United States, individual giving to charitable organizations is critical to the survival of these organizations.  Accordingly, the tax benefits of charitable giving differ significantly from Europe.  Taxation in the United States can be complicated.  One effective strategy to make the most of your tax-deductible charitable contributions is called “bunching” with a Donor Advised Fund (DAF). Let’s explore this strategy in more detail.



What is a Donor Advised Fund (DAF)?
A Donor Advised Fund (DAF) is a type of tax-exempt charity that can be a powerful tool for charitable giving. Use of a DAF simplifies the donation process and offers tax benefits. Here’s how it works:

1. Contribution to the DAF: You contribute cash, securities, or other assets to the DAF, which is managed by a financial institution or community foundation.
2. Tax-Exempt Growth: The assets in the DAF can be invested, and any growth is tax-exempt. This means that the total amount available for charitable donations can grow over time.
3. Flexibility in Distributions: After you contribute to the DAF, you can request that the DAF custodian make grants to other tax-exempt charities of your choosing over time.  The DAF can only be used to make grants to other tax-exempt charities, but there is no time limit to use up the DAF. Many taxpayers choose to “bunch” their charitable contributions by contributing a large amount to a DAF in a strategic tax year, then granting out the balance over time.

1. Strategic Giving for Tax Savings: Bunching donations into a single tax year can be beneficial. For example, if a married couple typically donates $8,000 annually, that donation is unlikely to provide the couple with any extra tax benefit because the simplified “standard deduction” is $29,200 in 2024.  Using the standard deduction will probably result in less tax than listing out or “itemizing” each of the couple’s deductible expenses (the $8,000 donation).  However, if this couple is able to "bunch" donations by contributing a larger amount, for example $40,000, to a DAF in one tax year, then granting out $8,000 per year, the couple will reduce their tax bill.  This is because the couple’s itemized deductions ($40,000+) would offset more taxable income than the standard deduction ($29,200) in the year of the big gift. This approach maximizes your tax benefits while allowing you to continue supporting your favorite causes.

2. Simplified Record-Keeping: Another major advantage of using a DAF is the ease of managing your donations. Instead of tracking multiple individual donations, you can consolidate them into a single contribution to your DAF. This means fewer transactions to record and a simpler filing process during tax season.