Donor-Advised Funds: A Smarter Way to Give

If you give to charity, you probably do it the way most people do: you write a check or make an online donation, usually toward the end of the year, and you feel good about it. There’s nothing wrong with that. But there’s often a much smarter way to give, one that lets you support the same causes, give the same amount or more, and meaningfully reduce your tax bill in the process.

The catch is that getting the tax benefit from charitable giving has gotten harder for most people. Because the standard deduction is now fairly large, many households don’t itemize their deductions anymore, which means their charitable gifts produce no tax benefit at all. And starting in 2026, there’s a second hurdle: even if you do itemize, you only get a deduction for the portion of your charitable giving that exceeds 0.5% of your adjusted gross income (your AGI, which is basically your income after certain adjustments). You’re still giving generously. You’re just not always getting credit for it on your return. The good news is that a couple of strategies can fix that, and a tool called a donor-advised fund makes them easy to execute.

What a donor-advised fund actually is

A donor-advised fund (DAF) is essentially a charitable investment account. You contribute money or assets to the fund, you take the tax deduction in the year you contribute, and then you recommend grants to the charities of your choice over time, whenever you’re ready. The money you’ve set aside can be invested and grow tax-free while it waits to be distributed.

Here’s the key insight: the year you fund the account and the year the money reaches the charity don’t have to be the same. That separation between when you get the tax deduction and when you actually give the money is what makes a DAF such a flexible planning tool. You can capture a deduction in a high-income year, then support your favorite causes gradually over the following years.

Strategy one: bunching your donations

Bunching is the technique that solves the standard deduction problem. Instead of giving a moderate amount every year (and getting little or no tax benefit because you don’t clear the itemizing threshold), you combine several years’ worth of giving into a single year. That concentrated gift can push you over the standard deduction, letting you itemize and capture a real tax benefit. In the off years, you take the standard deduction as usual.

Bunching also helps with that newer 0.5%-of-AGI hurdle. Because the floor applies every year you give, a steady stream of smaller gifts can lose part of its deduction year after year. Concentrating several years of giving into one clears the floor once instead of taking that haircut annually. So the same total gift, simply timed differently, can produce a noticeably larger deduction.

A donor-advised fund is what makes bunching practical. You contribute the large, bunched amount to your DAF in one year and take the deduction then. But your favorite charities don’t have to receive a giant lump sum all at once. You recommend grants from the fund at your normal pace, so the organizations you support still get steady, predictable gifts. You get the tax efficiency, and they get the consistency.

Strategy two: give appreciated assets, not cash

This is the strategy that most people miss, and it’s often the most valuable one. If you own investments that have grown in value, like stocks or funds in a taxable brokerage account, you generally have a built-in tax liability waiting for you. When you eventually sell those investments, you owe capital gains tax on the growth.

But if you donate the appreciated investment directly to a charity or a donor-advised fund instead of selling it, something powerful happens. As long as you’ve held it for more than a year, you generally avoid the capital gains tax entirely, and you can typically deduct the full fair market value of the investment. You’ve eliminated a future tax bill and earned a deduction at the same time, all while giving the charity the same value they would have received from a cash gift. (One detail worth knowing: deductions for gifts of appreciated assets are generally capped at 30% of your AGI in a given year, but anything above that limit can carry forward for up to five years, so it isn’t lost.)

Compare the two paths. If you sell an appreciated stock and donate the cash, you pay tax on the gain first, leaving less to give and less to deduct. If you donate the stock directly, the full value goes to the cause and the gain is never taxed. For anyone sitting on investments that have grown significantly, this one move can turn an ordinary gift into a genuinely tax-smart one.

Where this fits in the bigger picture

Charitable giving is rarely just about charity. Done well, it sits at the intersection of your tax strategy, your investment portfolio, and your long-term goals. The decision of what to give, when to give it, and which assets to use can ripple across your entire financial picture. A bunched gift of appreciated stock in a high-income year, for example, can accomplish three things at once: it supports a cause you care about, it trims a concentrated position in your portfolio, and it reduces your tax bill in the year you need it most.

That kind of coordination is the whole point. The mechanics of a donor-advised fund are simple enough, but the real value comes from fitting it into the rest of your plan. The timing of your contributions, the assets you choose to give, and how it all lines up with your income and investment strategy are what turn ordinary generosity into something far more efficient. You were going to give anyway. A little strategy just makes every dollar go further, both for the causes you support and for your own financial picture.

Sources:
https://www.nptrust.org/what-is-a-donor-advised-fund/daf-tax-consideration/
https://legalclarity.org/how-the-donor-advised-fund-deduction-works/

This information is provided as general information and is not intended to be specific financial guidance.  Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives. The source(s) used to prepare this material is/are believed to be true, accurate and reliable, but is/are not guaranteed.