How a DAF can save you taxes on charitable giving

When it comes to charitable giving, I noticed that most people follow a familiar pattern by writing some checks or making cash or online donations at the end of every year.

It feels good to support causes we care about and there is nothing wrong with this simple approach.

However, if you also want to get a tax break for your contributions, you need to think ahead.

Under the new rules, not only is there a limit to how much you can deduct, but now there is also an "AGI floor" of 0.5% you have to jump over.

To put this differently, if your Adjusted Gross Income (AGI) is $200,000, the first $1,000 (or 0.5% of AGI) is not even deductible.

But I am getting into the weeds here…

What I really wanted to talk about is the benefits of creating a Donor Advised Fund (DAF).

For those of you who have been reading our newsletter for a while, you know that we cover this topic each year.

And there is a good reason behind it.

A Donor Advised Fund is essentially a personal charitable account.

You contribute money to it, get an immediate tax deduction and then decide over time which charities to support from the fund.

When it makes sense for you to create a DAF, it can really help you not only support your favorite charities but also significantly reduce your tax bill.

To help you understand where I am coming from, here is a specific analysis we prepared for one of our clients last week. So fresh off the press!

Alice and Robert

These are not their real names, of course.

For some background, this year, Alice and Robert are in the middle of their multi-year Roth conversion strategy.

The goal is to make large Roth conversions, between $50,000 to $100,000 per year, for the next few years.

I won't get into the benefits and logistics of multi-year Roth conversions in this newsletter.

But in summary, the conversions mean their tax bill this year will be higher and will even push them from the 22% into the 24% tax bracket.

Alice and Robert were already planning to donate around $7,500 per year to their favorite local charities over the next number of years.

If they had simply donated $7,500 each year, they would still be itemizing their deductions but would be close to the standard deduction they would get anyway.

This effectively reduces the benefits of the charitable deduction.

To solve this issue, we discussed creating a DAF for them in 2026.

Here is how it worked

They contributed $40,000 in appreciated stock into their DAF in 2026.

This is called "bunching" which is when you concentrate multiple years of charitable giving into a single tax year to get a much larger deduction all at once.

Under current rules, itemized charitable gifts are deductible for the amount that exceeds the 0.5% AGI floor and up to 30% of AGI for long term capital gains property.

You don't need to memorize this and I am just mentioning it to be comprehensive.

By using the bunching strategy in their new DAF account, the vast majority of their $40,000 contribution easily pushed their total itemized deductions far past the standard deduction.

Their deduction was even large enough to absorb some of the additional taxes from the Roth conversion.

This is what makes the strategy especially powerful.

It doesn't just support their charitable goals. It also helps offset the tax cost of the Roth conversions they were already planning to do.

Based on our calculations, the $40,000 contribution saved them around $11,900 in taxes, which is nearly 30% of their contribution.

Not bad, right?

But that is not all.

Since the contributions were made with appreciated stock, this strategy also eliminates the unrealized capital gains on the position we transferred to the DAF.

I estimate this saves an additional $4,000 to $6,000 in capital gain taxes depending on how and when they would be realized.

The funds now sit inside their DAF, where they can be invested to grow tax-free.

Over the next number of years, Alice and Robert will grant $7,500 per year, or any other amount of their choice, to their favorite non-profits on their normal schedule.

The charities notice no gap in funding, but the tax impact for the couple was incredibly helpful.

Should you consider creating a DAF?

Well, this newsletter is, of course, for information purposes only. So it’s not any kind of investment, tax or financial advice.

So who should think about a DAF?

Anyone who consistently gives to charity, is in a high income year (like Alice and Robert during their Roth conversions) or wants to give appreciated stock instead of cash.

If any of these apply to you, this could be one of the highest impact planning conversations to have.

If you have any questions, feel free to reach out.