A donor-advised fund (DAF) serves as a 501(c)(3) charity where you can contribute to charitable causes while enjoying tax deductions in the same year. Once you donate funds, stocks, real estate, or other appreciated assets, the money is invested for future growth. You then have the freedom to distribute gifts, known as grants, to various charities from your account.

Numerous reputable DAFs are available, including those affiliated with large financial institutions like Vanguard, Fidelity, and Schwab. Additionally, local community foundations may also offer DAF options. It's important to check for minimum contributions required to establish a DAF and any minimum balance requirements. Administrative fees are generally low, but reviewing the specifics of the DAF before making your initial donation is wise.

Using a donor-advised fund can be advantageous for tax purposes, facilitating itemized deductions—even if you choose to do this in alternate years or sporadically, a technique referred to as “lumping and clumping.” You can also distribute funds to your favorite charities in years when you don’t itemize, helping to smooth out your charitable giving. For example, you might deposit $15,000 into a DAF in 2022 and grant $5,000 to your preferred charity in 2022, 2023, and 2024.

Furthermore, donating non-cash assets can enhance your tax benefits. If you donate stocks purchased at a low price, for instance, you can claim an itemized deduction equal to the stock's fair market value—up to 30% of your adjusted gross income—while also avoiding capital gains taxes since the DAF sells the stock. Remember, you must have owned the stock for at least a year prior to donation.