Giving is an important part of our society for many. It can provide us the opportunity to support causes we believe in and make a positive impact. Keep in mind, giving isn’t always about donating money. It can also include volunteering time or donating goods and resources. Here are some examples of the impact:1
- In 2023, Americans donated $557.16 billion, 67% of this giving was attributed to individuals.
- High net worth households gave nearly $35,000, on average, in 2022.
- There are more than 1.8 million nonprofit organizations registered in the U.S.
- In 2022, Americans contributed $85.53 billion to donor-advised funds
Financial donations from individuals directly to charity account for the largest source of charitable giving. This type of giving, for example, can consist of writing a check to a charity and that charity benefiting immediately. Without that charitable inclination on the part of the individual, most donations wouldn’t happen.
The Tax Impact of Charitable Giving
The personal financial and income tax impact from charitable giving can affect the size of the gift and the timing of giving. If a family has a large taxable income year, they may be willing to increase donations to reduce their income tax liability.
We sometimes see this when families are in their peak income-earning years with retirement on the horizon. We also sometimes see this when a transaction or other event causes a one-time spike to taxable income, such as substantial bonuses, payout of deferred compensation or sale of a business.
In any of these cases, the family may be willing to donate more and receive the benefits of a larger income tax deduction. Donations can also be deferred until death to manage estate taxes or create a charitable legacy.
Two Savvy Ways to Donate
Did you know you can donate in a high-income year, and charitable grants can occur in a subsequent year? Two of the most popular charitable vehicles for this technique have been the private foundation and a donor-advised fund.
Many people have heard of private foundations but are less familiar with donor-advised funds (DAFs). They were created in the 1930s, but didn’t begin growing in popularity until the 1990s. DAFs are a charitable giving vehicle sponsored by a public charity that allow the donor to make an irrevocable charitable contribution and be eligible for an immediate tax deduction. Over time, the grantor can recommend grants to IRS-qualified public charities.
More specifically, a DAF is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, either the donor or the donor’s representative retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.
DAFs vs. Private Foundations
Personal involvement after the initial funding is quite distinct between the two. A DAF provides a turnkey solution for the donor. Costs associated with a DAF are relatively minimal. A private foundation, on the other hand, is a charitable organization with operational needs that might include employing staff, hiring investment managers and actively managing grant-making. Funding into a Private Foundation needs to be substantial enough to justify the costs associated with creating and operating the organization.
Another distinction between a DAF and a private foundation is the limit for an income tax deduction. Cash donations to a DAF are deductible up to 60% of adjusted gross income (AGI), but cash donations to a private foundation are limited to 30% of AGI.
DAFs also have an advantage with the deduction for appreciated stock up to 30% of AGI, whereas private foundations are limited to 20% of AGI.
Here’s a side-by-side comparison:
| Donor Advised Funds | Private Foundations | |
| Organizations you can support | IRS-qualified public charities | Many organizations and individuals, as long as the grant is made for a charitable purpose |
| Growth Potential | √ | √ |
| Donations of Non-Cash Items | √ | √ |
| Income Tax Deduction (% of AGI) | 60% cash 30% appreciated assets |
30% cash 20% appreciated assets |
| Tax on Investment Income | None | 1% or 2% of foundation’s net investment income |
| Option to Support Anonymously | √ | × |
| Ability to Name Successors | √ | √ |
Want to Learn More About Donor-Advised Funds?
Using a donor-advised fund for charitable giving or another financial vehicle can have a lasting impact on society and provide benefits to the donor as well.
Just like the rest of your financial journey, optimized giving can be complex and should follow a plan. Contact your financial advisor or reach out to us today to learn how you can incorporate charitable giving in your financial plan.
1 National Philanthropic Trust, “Charitable Giving Statistics,” 2024. https://www.nptrust.org/philanthropic-resources/charitable-giving-statistics/
Tom Fridrich is a non-registered associate of Cetera Advisor Networks LLC, Member FINRA/SIPC.
The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
