How to Report Donations to a Donor Advised Fund (DAF) On Your Taxes
Donor Advised Funds (DAF) allows donors to contribute assets, receive immediate tax deductions, and later direct grants to their preferred charitable organizations. They are simple, yet powerful tools to use in a giving strategy.
See Charitable Giving through a Donor Advised Fund – Gilbert Wealth for more information on why DAF’s are so powerful.
If you’ve decided to use a DAF, now you need to correctly reporting these donations on your tax return is crucial to ensure compliance with IRS regulations and to fully benefit from the available deductions.
The Tax Benefits of DAF's
Immediate Tax Deduction
One of the main advantages of donating to a DAF is that contributions are immediately tax-deductible in the year they are made, even if the funds are not distributed to charities until a later date. The deduction limits depend on the type of asset donated:
- Cash Contributions: Donors can deduct up to 60% of their Adjusted Gross Income (AGI).
- Non-Cash Assets (e.g., Stocks, Real Estate, Crypto): Donations of appreciated assets held for over one year are deductible up to 30% of AGI.
If contributions exceed these limits, the excess amount may be carried forward for up to five years.
Avoiding Capital Gains Taxes on Donated Securities
When donating appreciated securities, such as stocks, mutual funds, or real estate, donors avoid capital gains tax on the unrealized gains. This makes contributing non-cash assets to a DAF an efficient way to increase charitable impact while reducing tax liability.
Avoiding Taxation on Investments In the DAF
How to Report Donations to a DAF on Your Tax Return
What Documents You Receive As a Result of Your Donation
When you make a donation to a Donor-Advised Fund (DAF), you will receive a contribution acknowledgment letter from the sponsoring organization (e.g., Fidelity Charitable, Schwab Charitable, Vanguard Charitable). This letter serves as official documentation for tax purposes and confirms the details of your donation.
For All Donations
DAF contributions are deductible only if the donor itemizes deductions on their tax return. This means that those taking the standard deduction cannot claim an additional deduction for DAF contributions.
- Use Schedule A (Form 1040) to report charitable contributions.
- The deduction amount depends on the type of asset contributed and the donor’s AGI.
Additional Requirement for Non-Cash Donations – IRS Form 8283
If a donor contributes non-cash assets worth more than $500, they must file Form 8283 with their tax return. This form requires specific details about the donation, including:
- Description of the Asset: Clearly state what was donated.
- Acquisition and Donation Dates: Provide both the purchase and donation dates.
- Original Cost Basis and Fair Market Value (FMV): Report how much the asset was originally purchased for and its FMV at the time of donation.
- Method Used to Determine FMV: Explain how the asset’s value was calculated (e.g., stock trading prices, real estate appraisal).
More detailed instructions for Form 8283 can be found here: About Form 8283, Noncash Charitable Contributions | Internal Revenue Service
Frequently Asked Questions
When the DAF distributes money to the Charity, do you get a deduction?
No. A donor receives a deduction up front for the donation but no further deductions are received.
How Do You Find Fair Market Value and Cost Basis for a donation to a Donor Advised Fund?
The Fair Market Value (FMV) of publicly traded securities donated to a Donor-Advised Fund (DAF) is typically based on the date the securities are transferred out of your account and into the DAF. This is considered the date of donation for tax purposes. The Fair Market Value (FMV) is typically determined by averaging the high and low trading prices of the security on the date of donation. This valuation method aligns with IRS guidelines for charitable contributions of publicly traded assets
The cost basis, on the other hand, is the original purchase price of the security, including any associated commissions or fees and can be found on your statements.