Donor-Advised Funds and Charitable Bunching
Why Charitable Bunching Matters Now
The 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction, making itemizing uneconomical for most taxpayers. In 2024, the standard deduction is $14,600 for single filers and $29,200 for married filing jointly. If your itemized deductions (charitable contributions, state and local taxes, mortgage interest) fall below these thresholds, you receive zero tax benefit from charitable giving.
The bunching strategy solves this problem by concentrating multiple years of charitable contributions into a single tax year, pushing total itemized deductions above the standard deduction threshold. A donor-advised fund (DAF) serves as the vehicle that enables bunching while maintaining steady annual distributions to charities.
The arithmetic: A married couple giving $8,000 annually to charity with $18,000 in other itemized deductions totals $26,000 itemized versus $29,200 standard deduction. They take the standard deduction and receive $0 tax benefit from their $8,000 gift. By bunching 3 years of gifts ($24,000) into one year, itemized deductions reach $42,000, exceeding the standard by $12,800 and generating real tax savings.
How Donor-Advised Funds Work
A DAF is a charitable investment account that provides an immediate tax deduction when funded, while allowing grants to operating charities over time.
Step 1: Open account
Establish a DAF at a sponsoring organization. Major providers include:
- Fidelity Charitable (minimum $0, grants $50)
- Schwab Charitable (minimum $0, grants $50)
- Vanguard Charitable (minimum $25,000)
- Community foundations (minimums vary)
Step 2: Make irrevocable contribution
Contribute cash, appreciated securities, or other assets to the DAF. The contribution is irrevocable and immediately tax-deductible in the year made. You can no longer access these funds for personal use.
Step 3: Invest for growth
The DAF sponsor offers investment options (similar to mutual funds). Contributions grow tax-free while awaiting distribution to charities.
Step 4: Recommend grants
You recommend grants to qualified 501(c)(3) charities at any time. The sponsoring organization sends funds directly to the charity. There is no timeline requirement for making grants, though most sponsors encourage regular granting.
Contribution Limits and Deduction Rules
DAF contributions follow charitable contribution deduction limits:
| Asset Type | AGI Limit | Deduction Basis |
|---|---|---|
| Cash | 60% of AGI | Full amount contributed |
| Publicly traded securities (held >1 year) | 30% of AGI | Fair market value |
| Privately held stock | 20% of AGI | Cost basis only |
| Real estate (held >1 year) | 30% of AGI | Fair market value (with appraisal) |
Carry-forward rule: Contributions exceeding AGI limits carry forward for up to 5 years.
Example: A donor with $200,000 AGI contributing $80,000 cash to a DAF can deduct $60,000 (60% x $200,000) in year one. The remaining $20,000 carries forward to year two.
Source: IRC Sections 170(b)(1)(A) and 170(e).
The Bunching Strategy Explained
Bunching concentrates deductible expenses into alternating years, creating one itemizing year followed by one (or more) standard deduction years.
Traditional approach (no bunching):
Year 1:
- State and local taxes (SALT): $10,000 (capped)
- Mortgage interest: $8,000
- Charitable: $8,000
- Total itemized: $26,000
- Standard deduction: $29,200
- Benefit: $0 from itemizing (take standard)
Year 2: Same pattern. Same result.
Year 3: Same pattern. Same result.
3 years: $0 charitable deduction benefit across $24,000 in gifts
Bunching approach:
Year 1 (bunching year):
- SALT: $10,000
- Mortgage interest: $8,000
- Charitable: $24,000 (3 years bundled into DAF)
- Total itemized: $42,000
- Standard deduction: $29,200
- Benefit from itemizing: $42,000 - $29,200 = $12,800 excess
Year 2 (standard deduction year):
- Take $29,200 standard deduction
- No charitable gifts needed (DAF distributes to charities)
- Benefit: Full standard deduction
Year 3 (standard deduction year):
- Take $29,200 standard deduction
- No charitable gifts needed (DAF distributes)
- Benefit: Full standard deduction
3-year totals:
- Bunching: $42,000 + $29,200 + $29,200 = $100,400 in deductions
- Traditional: $29,200 + $29,200 + $29,200 = $87,600 in deductions
- Additional deductions captured: $12,800
- Tax savings at 24% bracket: $3,072
Multi-Year Bunching Example
Your situation:
- Married filing jointly
- AGI: $250,000
- Annual charitable intent: $10,000/year
- SALT: $10,000 (at cap)
- Mortgage interest: $12,000
- 2024 standard deduction: $29,200
- Federal tax bracket: 32%
5-year bunching strategy:
Year 1: Contribute $50,000 to DAF (5 years of giving)
Itemized deductions:
- SALT: $10,000
- Mortgage interest: $12,000
- Charitable (DAF contribution): $50,000
- Total: $72,000
Deduction benefit: $72,000 vs. $29,200 standard = $42,800 excess itemized deductions
Years 2-5: Take standard deduction, grant $10,000/year from DAF
Each year: $29,200 standard deduction
5-year comparison:
| Approach | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total |
|---|---|---|---|---|---|---|
| No bunching | $29,200 | $29,200 | $29,200 | $29,200 | $29,200 | $146,000 |
| Bunching | $72,000 | $29,200 | $29,200 | $29,200 | $29,200 | $188,800 |
Additional deductions: $42,800 Tax savings at 32%: $13,696
You contributed the same $50,000 to charity but saved $13,696 in federal taxes through bunching.
Contributing Appreciated Securities
DAFs accept appreciated publicly traded securities, providing a double tax benefit:
- Avoid capital gains tax on the appreciation
- Deduct full fair market value (not cost basis)
Example:
Stock purchased for $10,000 now worth $30,000 (held over 1 year).
Option A: Sell stock, donate cash
- Capital gains: $20,000 x 20% = $4,000 tax
- Cash available to donate: $26,000
- Deduction: $26,000
Option B: Donate stock directly to DAF
- Capital gains tax: $0
- Deduction: $30,000 fair market value
- Additional benefit: $4,000 tax avoided + $4,000 extra deduction value
The practical result: Donating $30,000 of appreciated stock costs you $10,000 (your original basis) out-of-pocket. Selling and donating cash costs $14,000 ($10,000 basis + $4,000 capital gains tax).
Source: IRC Section 170(e)(1) allows FMV deduction for long-term capital gain property.
Common Pitfalls
Pitfall 1: Exceeding AGI limits
A $100,000 stock contribution when AGI is $150,000 creates only $45,000 deductible immediately (30% of AGI). The remaining $55,000 carries forward but may expire if not used within 5 years.
Prevention: Calculate your AGI and applicable percentage limits before large contributions. Consider spreading mega-gifts across multiple years.
Pitfall 2: Donating short-term holdings
Securities held less than one year receive cost basis deduction only, not fair market value.
Example: Stock purchased 6 months ago for $10,000 now worth $15,000. Donation deduction: $10,000 (basis), not $15,000 (FMV).
Prevention: Verify holding period exceeds one year before contributing appreciated assets.
Pitfall 3: DAF investment losses
DAF contributions are irrevocable. If investments decline, you lose value but cannot claim additional tax deductions.
Prevention: Consider conservative investment allocations in DAFs, especially if you plan to grant funds soon.
Pitfall 4: Never granting funds
Some donors contribute to DAFs for tax deductions but never grant to operating charities. While legally permissible, this contradicts charitable intent and has drawn Congressional scrutiny.
Best practice: Establish a granting schedule. Many DAF sponsors encourage minimum 5% annual distributions.
Pitfall 5: Ignoring state taxes
State charitable deduction rules vary. Some states cap deductions, others conform to federal limits, and a few provide no charitable deduction.
State planning: Verify your state's treatment of DAF contributions before assuming full deductibility.
Implementation Checklist
Planning Phase
- Calculate annual charitable giving amount
- Compare itemized deductions to standard deduction
- Determine how many years to bunch (2-year, 3-year, 5-year cycle)
- Identify appreciated securities for contribution
- Confirm AGI limits allow full immediate deduction
Opening DAF Account
- Select DAF sponsor (Fidelity, Schwab, Vanguard, community foundation)
- Complete account application
- Name successor advisors (spouse, children)
- Designate charitable beneficiaries (optional at opening)
- Select investment allocation
Making Contributions
- Time contribution for bunching year (before December 31)
- If contributing stock, verify 1+ year holding period
- For stock, initiate transfer through brokerage DTC process
- Allow 1-2 weeks for stock transfers to complete before year-end
- Retain confirmation for tax records
Granting Phase
- Establish annual granting schedule
- Verify recipient organizations are 501(c)(3) qualified
- Submit grant recommendations through sponsor portal
- Track grants for personal records
Tax Filing
- Obtain acknowledgment letter from DAF sponsor
- Report contribution on Schedule A, line 11
- For securities, report fair market value (no Form 8283 required for publicly traded securities valued under $500,000 if DAF provides written acknowledgment)
The DAF plus bunching strategy converts unusable charitable deductions into valuable tax savings by timing contributions strategically. The approach works best for donors with stable giving intentions, non-itemizing status under normal circumstances, and appreciated securities available for contribution.