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New Rule Proposal for Donor Advised Funds Under Section 4966

February 16, 2024 11:46 AM | Anonymous

What are Donor Advised Funds??

Donor Advised Funds (DAFs) are philanthropic vehicles that allow donors to make charitable contributions, receive an immediate tax deduction, and then recommend grants from the fund over time. Section 4966 of the Internal Revenue Code (IRC) governs the taxation of distributions from DAFs to public charities.

Here's a review of the tax implications of table distributions from DAFs under Section 4966:

  1. Tax Deductibility of Contributions: Contributions to a DAF are tax-deductible in the year they are made, subject to certain limitations based on the donor's adjusted gross income and the type of asset contributed. Donors can contribute cash, appreciated securities, real estate, or other assets to a DAF.
  2. Tax Treatment of Distributions: When a donor recommends a distribution (grant) from the DAF to a qualified public charity, the amount distributed is not taxable to the donor, as long as it meets the requirements of Section 4966.
  3. Distribution Requirements: Distributions from DAFs must be made to qualified public charities, which are organizations described in IRC Section 170(b)(1)(A) or (B)(1)(A) (excluding private foundations). Distributions cannot be used to fulfill a legally binding pledge or satisfy a pre-existing legal obligation of the donor or related parties.
  4. Tax on Excess Benefit Transactions: If a distribution from a DAF is used to pay for goods or services that confer more than incidental benefits on the donor, advisor, or related parties, it may be considered an "excess benefit transaction." In such cases, penalties may apply to the donor, advisor, or related parties under Section 4958.
  5. Tax Reporting: DAF sponsoring organizations are required to report distributions made from DAFs on Form 990, the annual information return filed by tax-exempt organizations. Donors who recommend distributions from their DAFs do not need to report these distributions on their individual tax returns since they are not considered taxable income.
  6. Potential Impact on Estate Taxes: Contributions to DAFs can also reduce a donor's taxable estate, potentially resulting in estate tax savings for larger estates.

Overall, Section 4966 provides a tax-efficient way for donors to support charitable causes through DAFs while maximizing tax benefits. However, donors should ensure compliance with the IRS regulations governing DAFs to avoid potential penalties and maintain the tax-exempt status of their contributions. Consulting with a tax advisor or financial planner familiar with charitable giving strategies can provide personalized guidance based on individual circumstances.

SOURCES FOR THIS ARTICLE: Taxes on Taxable Distributions From Donor Advised Funds Under Section 4966

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