📈 Turn Income into Impact: How DAFs Amplify Philanthropy

☕Good morning! 

Welcome back to your go-to source for making smart money moves, Making Cents of Your Money. 

This week, our making smart money moves are about giving away money, smartly. We’re slicing through the complexity of Donor-Advised Funds (DAFs) versus regular charities and how DAFs can be a game-changer for high-earners.

Let’s get into it!

🏆 Donor-Advised Funds: An Overview

Imagine you're in a higher-than-usual income bracket this year. You could mobilize those extra earnings into a personally meaningful cause and get a substantial tax deduction, all while retaining the freedom to manage how your charity dollars are spent over time. 

As we’ll discover, DAFs combine immediate tax benefits with the flexibility to manage charitable contributions strategically over time. 

By making an irrevocable contribution to a fund managed by a charitable entity, donors can claim a tax deduction upfront and direct how and when the funds reach their chosen charities. 

Critically, the funds grow tax-free. Paired with an aggressive investment strategy, this year's lump sum could blossom into a hefty sum in just a decade. 

For example, $150,000 at a 10% rate of return will be nearly $390,000 in just ten years– without a dime going to the government. 

🧠 There are a few things you should keep in mind, though.

Cash donations offer a hefty immediate tax deduction (up to 60% of your AGI). 

But, if you’ve got appreciated securities, you could dodge the capital gains tax by donating them– and you can still deduct up to 30% of your AGI.

Turn a high-income year into high-impact. 

Got a windfall year? 

You could be looking at upwards of 37% in federal income tax, which begs the question– would you rather pay the government 37% on money you could otherwise give to charity?

The answer varies based on your philanthropic tendencies– no judgment either way. It’s a big decision to make and definitely worth going over with a financial planner. 

However, you can "bunch" your donations and stack multiple years' worth of giving into one tax year to maximize deductions and earmark a pool of funds to grow tax-free that can be distributed indefinitely. 

🎯 You can craft an investment strategy with your DAF sponsor to fit your goals.

 An aggressive growth strategy can amplify your impact, perfect for fulfilling multi-year commitments to causes you care about– albeit, it does come with the risk of potential downswings.

🤑 DAFs come with admin fees and minimum donation requirements. 

Ensure these fit your philanthropic goals and budget for maximum efficiency.

📈 DAF vs. Direct Charity: 

The most significant difference between a Donor-Advised Fund and a charity is you still have a say in how and when DAFs use your money. 

(DAFs) aren’t just any charitable repository; they are managed by established charitable organizations like community foundations or specialized nonprofits linked to financial powerhouses such as Vanguard Charitable, Fidelity Charitable, and Schwab Charitable. 

This isn’t to say charities don’t have competent people administering funds, but financial institutions provide a rigorous framework and tend to set a higher standard for handling contributions. 

Unlike direct donations, where your influence ends as soon as the money leaves your hands, DAFs offer the unique advantage of continued donor involvement. 

Your donations grow tax-free, and you receive immediate tax relief, but the real kicker? You retain a say in how these funds are utilized– in both direction and in the period of disbursement.

While the DAF sponsor makes the final decision, there is a strong precedent for honoring donor recommendations, barring legal or policy conflicts.

Where Can Your DAF Contributions Go?

Sure, you’ll get some tax relief from these strategic contributions, but the real benefits lie in maximizing the impact and control over your charitable giving.

The money you give away is irrevocable; no matter how much it saves you in taxes, you’re still giving it away.

Still, you may feel a greater calling to a philanthropic mission. Maybe you’ve got a specific cause you’re passionate about today, or you’d like a little inspo. 

DAFs tend to support a wide variety of charitable organizations and niches, including:

🏫 Universities and Schools: Funding scholarships, building projects, or general operations. For example, you may want to support your alma matter! 

🏥 Hospitals and Medical Research: Contributing to groundbreaking medical research, patient care initiatives, and new healthcare facilities.

🎨 Arts and Culture: Supporting museums, theaters, and cultural institutions to help them thrive and enrich communities.

🌿 Environmental Groups: Backing conservation efforts, wildlife preservation, and climate change initiatives to protect our planet.

🤝 Social Services: Providing essential services like food banks, homeless shelters, and resources for domestic violence survivors.

🌍 Global Aid: Offering disaster relief, humanitarian aid, and development assistance to make a global impact.

One of the most underrated perks of DAFs is that you don’t have to decide just yet– you can have a say in how DAFs disburse your funds over an indefinite length of time. 

psst Sharing is caring—forward this newsletter to anyone interested in maximizing their philanthropic impact. 😀

Making Cents of DAFs

Use DAFs in your legacy planning. Involve your family in choosing charities, creating a tradition of giving that lasts generations. 

Navigating the complexities of charitable giving and tax savings can be challenging, and a financial planner can help you make informed decisions, optimize your tax benefits, and align your philanthropic efforts with your financial goals. 

To get started, it helps to evaluate your philanthropic goals and define what you want to achieve with your charitable giving. 

To warm up further, research various DAF sponsors, including community foundations, financial institutions, and charities; compare their fees, investment options, and grant-making policies to find the best fit for your goals.

Just know the mission isn’t complete when you wire the funds; the fun part is measuring your impact.

Many DAF sponsors offer tools, visualizations, and reporting to help you see the real-world effects of your grants. Think about how you’d measure the success of your charitable giving.

Until next week! 

Dan from Tailored Cents

P.S. Follow me on LinkedIn for more tax gems to save you money.