Why a Donor-Advised Fund Could Be Your Best Tax Move This Year

Flexible giving, real tax impact

If you’re charitably inclined and tax-conscious, a donor-advised fund (DAF) can be one of the most efficient ways to give. With upcoming tax law changes, the next year is also a particularly strategic time to consider contributing.

How a Donor-Advised Fund Works

A donor advised fund is a charitable account designed for people who want to give strategically and who already itemize their deductions.

You contribute cash or appreciated investments, and you receive the tax deduction in the year of the contribution. Once the contribution is made, it is considered a completed, irrevocable charitable gift. The funds can no longer be used for personal expenses or non-charitable purposes.

After the donation is made, the assets are typically invested inside the fund, which allows those dollars to potentially grow over time.

From there, you remain in control of the charitable intent. You can log in at any time and recommend grants to IRS qualified public charities, including registered nonprofits and religious organizations. You do not have to give all of the money away at once. You can make grants over multiple years, or even your lifetime.

This structure gives you flexibility. You can time your tax deduction when it is most valuable to you, and then decide later which organizations you want to support and when.

The Part Most People Miss: Capital Gains Tax Savings

The most powerful feature of a DAF is what happens when you donate appreciated investments instead of cash.

Example:

You bought a stock years ago for $50,000 and it’s now worth $150,000

If you sell the stock and donate the proceeds:
• You realize a $100,000 capital gain
• You owe federal and state capital gains tax
• You donate what’s left after taxes

If you donate the stock directly to a DAF:
• You owe zero capital gains tax (in most situations)
• You receive a charitable deduction for the full $150,000
• The nonprofit gets the full value

You’re able to give more and lose less to taxes, simply by changing how you give.

Why 2025 Is a Key Planning Year

Beginning in 2026, charitable deductions will be subject to a new AGI based floor of 0.5%. In simple terms, adjusted gross income, or AGI, is your total income after certain adjustments such as retirement contributions, HSA contributions, and student loan interest. This means you do not receive a tax deduction until your donations exceed that threshold.

It is not a phaseout. It is a hard starting point.

Here is what that looks like in real dollars:

• If your AGI is $250,000: 0.5% equals $1,250, so your first $1,250 of charitable giving does not generate any tax deduction

• If your AGI is $500,000: 0.5% equals $2,500, so your first $2,500 is not deductible

• If your AGI is $1,000,000: 0.5% equals $5,000, so your first $5,000 of giving provides no tax benefit

Because the floor scales with income, the higher your AGI, the more of your charitable giving produces no tax benefit at all. This is especially relevant for households who give consistently but do not give at levels that materially exceed the threshold every single year.

How to Think About This Strategically: Donation Bundling

Rather than giving smaller amounts every year, many high-income households will benefit from bundling multiple years of donations into one larger contribution before the new rule takes effect.

A DAF is the perfect vehicle for this:

• You take the tax deduction now

• You avoid capital gains tax on appreciated assets (in most cases)

• You can spread your charitable grants out over many future years

Bottom Line

A donor-advised fund lets you:

• Give more to the causes you care about

• Reduce your tax bill

• Avoid capital gains tax when contributing positions

• Lock in today’s rules before the 2026 changes

For high earners, the planning opportunity isn’t just about generosity - it’s about timing.