The Tax Law’s Big Win for Charities Makes DAF Giving Trickier

The tax bill included a big win for charities: a charitable deduction for everyday Americans who don’t itemize — $1,000 for single people and $2,000 for married couples. But the charitable deduction for non-itemizers is not available if the gift goes to a DAF.

“I’m sorry to see that because I thought that we had begun to see some democratization of donor-advised funds,” says Laura MacDonald, founder of the Benefactor Group, a fundraising consulting firm. Excluding DAFs from the tax benefit, she says, reduces the likelihood that small-dollar donors will give to them and codifies “DAFs as a tool of elite donors.”

As DAFs have become a more popular giving vehicle, there has been a growing push to encourage more everyday donors to use them. But the new tax changes add a wrinkle to that. It’s hard to know for sure how the tax law will affect taxpayers before it goes into effect next year, but many experts predict it will change how donors use DAFs — with the savviest taxpayers switching between itemization to donate to DAFs one year and taking the standard deduction and giving directly to charity other years.

Advantages for Itemizing Donors

Donor-advised funds are giving vehicles that let account holders take a charitable deduction immediately when they put money into the fund, assuming they itemize their taxes. However, there is no timeline for when DAF holders have to distribute those funds to charities. DAFs have long been used by the wealthy to get tax benefits. In recent years, some sponsoring organizations have pushed to make DAFs a giving vehicle for small-dollar donors as well.

“Organizations like Groundswell that are creating these workplace donor-advised funds so people can do payroll deduction to fuel a DAF and use that for their everyday giving — that’s going to be more difficult now because those gifts are not going to be tax-deductible,” MacDonald says.

If DAFs had not been excluded, “I think we could have seen an explosion in DAF usage among everyday donors,” says Mitch Stein, head of strategy at Chariot, a company that offers a DAF payment tool for charities.

With DAFs on the cutting room floor, it’s not entirely clear how the new deduction for non-itemizers will affect donors, says Danielle Vance-McMullen, an associate professor at DePaul University who studies DAFs and donor behavior.

“We don’t know what the results will be, partly because there are two forces happening at the same time,” she says. Those forces are the increase in awareness of DAFs and the new law that gives a tax advantage to non-itemizers if the money is given directly to charity. “It could work out in either direction.”

Jeff Williams, a co-founder of the DAF Research Collaborative, suspects the change will not affect small-dollar, non-itemizing donors who use DAFs because there is no change for them. There is no tax advantage in DAF giving for non-itemizers in either the old or the new law. Many everyday donors who have DAFs, he says, are “bundling” — in other words, saving enough money for it to be worthwhile to donate a big sum to a DAF and itemize their taxes.

“The bundling behavior — I really don’t see it affected,” says Williams, who is the director of the Johnson Center Community Data and Research Lab at Grand Valley State University. “If anything, I see it a little bit supercharged under the new bill.”

For example, he thinks people who bundle because of a wealth event — like a bonus or stock market gains — will continue to give to DAFs in those years when it makes sense but will also give directly to charities in years they take the standard deduction. Stein, at Chariot, agrees.

“You could see some people want to do their first $1,000 or $2,000 direct to a nonprofit and then their other giving in their DAF,” Stein says. “I don’t see it dampening DAF usage because there hasn’t been a tax benefit for the past eight years. And we’ve still seen growth in everyday donors using it.”

Mark Ottoni-Wilhelm is a professor at the Lilly Family School of Philanthropy at Indiana University who regularly does research on how tax law affects charitable giving. He estimates that 10 to 20 percent of taxpayers who take the standard deduction are giving a bit more than $2,000 a year to charity. Under the new tax law, they’ll likely “drop back to $2,000″ to get the full tax benefit.

If Stein and Williams are right, those types of families might take the additional money they were giving and bundle it into a DAF contribution and itemize in a future tax year instead.

2025 Bump

Because the tax law doesn’t take effect until 2026, many who want to take advantage of this year’s itemizing rules are expected to give big this year. And a significant share of that giving could go to DAFs.

“There could be a bump in the same way that we saw a bump at the end of 2017 before the Tax Cut and Jobs Act took effect in 2018,” Williams says. “So I expect a bump of money into DAFs. It’ll probably be noticeable.”

Based on his research, money that goes into DAFs is often distributed in three to five years.

The new law introduced more complexity into the tax code. Starting next year, donors who itemize will need to give 0.5 percent of their adjusted gross income before they can take a charitable deduction, and deductions will be capped at 35 percent. This new intricacy could have undesirable consequences.

“It’s added some complications into the math of giving,” Williams says. “And that’s what I’m nervous about: People throw up their hands and say, ‘Eh, forget it.’”

The good news is that donors tend to use their DAFs for strategic giving, says Vance-McMullen, meaning they’re thinking about their long-term goals and are often getting advice from tax planners. And despite the fact that the tax changes may affect how donors choose to fund their DAFs, it’s unlikely to affect money leaving DAFs.

“I don’t think the tax changes are going to change how people grant out of their DAFs,” Vance-McMullen says. “Most people are operating with the heart strongly and somewhat with the head in terms of their charitable giving. We sometimes overestimate the effect of these tax incentives for people’s giving. People want to give in the smartest way possible, but their overall impulse to give usually comes from the heart.”