A donor-advised fund (“DAF”) can be thought of as a sort of charitable investment account. DAFs let you contribute cash or appreciated stock to the fund, granting you an immediate tax deduction in the year you make the contribution, while allowing the assets to grow over time until you recommend grants to eligible charitable organizations. This allows donors to make contributions in high-tax years, take advantage of the tax savings now, and decide later when and how to make charitable grants.
The passage of the OBBBA in 2025 introduced a few wrinkles to the mechanics of DAF contributions and the related tax benefits. First, it established a “floor” on charitable deductions of 0.5% of your adjusted gross income (“AGI”). Second, for taxpayers in the highest federal income tax bracket (37%), the OBBBA generally limits the tax benefit of itemized deductions to 35%, rather than 37%. This is accomplished through a reduction of up to 2/37ths of otherwise allowable itemized deductions, with the precise reduction depending on how much of the taxpayer’s income falls within the highest tax bracket.
The tax deduction you are eligible for depends on the nature of the assets contributed to the DAF. For cash, a donor is eligible to deduct up to 60% of their AGI. As an example, assume a couple had AGI of $200k in 2026. In that same year, the couple contributed $150k in cash to a DAF. They would have a floor-adjusted contribution amount of $149k ($150k less the 0.5% floor) and would be entitled to deduct $120k on their taxes in the year the contribution was made (60% of their AGI). Because they could not deduct the entire value of the $150k gift in the year it was made, they would be able to carryforward the remaining $30k deduction for up to five years.
The rules work similarly for stock, although the deduction is limited to 30% of AGI, as opposed to 60% for cash. To qualify, the contributed stock has been held for more than one year. Provided that’s the case, the donor is entitled to deduct the fair market value of the shares contributed and, importantly, avoids recognizing any capital gains. So, instead of liquidating shares (and paying capital gains taxes before contributing to the DAF), one can contribute appreciated shares directly, both generating a deduction for the donor and preserving more resources for your chosen charitable causes.
It is worth noting that “overfunding” a DAF – or contributing more than you’re able to deduct on your taxes in a single year – may cause the carryforward benefits to go to waste if you do not regularly itemize your taxes. In the above example, our couple carried forward a $30k deduction. However, if over the next 5 years they did not itemize their taxes and instead took the standard deduction each year ($32,200 for married filing jointly in 2026), they would lose the carryforward deduction.
Ultimately, DAFs can be a powerful tool for charitably inclined individuals and families seeking to maximize the tax benefits of their giving while retaining flexibility over when and where grants are made. However, the timing, size, and composition of contributions can have significant tax implications. As such, donors should carefully consider their current and anticipated future tax circumstances when developing a charitable giving strategy.
