A donor-advised fund (DAF) is a giving account held by a public charity. You contribute cash or assets, take a charitable deduction in the year you contribute, and then recommend grants to other charities over the following months or years. The sponsoring charity owns the money from the moment you give it, so the contribution is irrevocable.
This guide gives donor-advised funds explained from a taxpayer's point of view for the 2026 filing year. The One Big Beautiful Bill Act (Public Law 119-21, which the IRS now groups under its "Working Families Tax Cuts" pages) changed the value of charitable deductions starting with tax years beginning after December 31, 2025. Itemizers now lose the first 0.5% of AGI in gifts, top-bracket itemizers see their deductions capped at roughly a 35% benefit, and the new deduction for people who do not itemize excludes gifts to a DAF.
The IRS describes a donor-advised fund as "a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization." Its donor-advised funds page adds that once you contribute, "the organization has legal control over it," while you or your representative keep "advisory privileges with respect to the distribution of funds and the investment of assets in the account."
The statutory definition sits in 26 U.S.C. 4966(d)(2). A fund or account is a DAF when it is separately identified by reference to a donor's contributions, is owned and controlled by a sponsoring organization, and gives the donor (or someone the donor appoints) advisory privileges over distributions or investments because of that donor's status. A fund that pays out only to one named organization is excluded from the definition.
Most DAFs follow the same sequence, though each sponsor sets its own minimums, fees, investment menus and grant policies.
Your deduction belongs to the year you contribute, and later grants out of the fund produce no second deduction.
AGI limits. Section 170 allows cash gifts to public charities up to 60% of your contribution base (essentially AGI), and gifts of appreciated capital gain property up to 30%. Amounts over the limit carry forward for five years.
Appreciated securities. Publication 526 says the amount of a property gift "is generally the FMV of the property at the time of the contribution," and defines capital gain property to include "capital assets held more than 1 year." Giving long-held stock instead of selling it and giving the cash lets you deduct the full market value and never recognize the gain. For higher earners, that also avoids the 3.8% net investment income tax on that gain. Because no sale occurs, nothing about the donated lot goes on Schedule D and Form 8949.
Losing positions. Do the opposite with stock that has dropped below cost. Sell it, claim the capital loss, and contribute the cash. If you plan to buy the same shares back, check the timing against the wash sale rule first.
Timing. You can take the deduction in a high-income year, such as the year you sell a business, and spread the grants over later years.
New section 170(b)(1)(I) allows itemized charitable deductions "only to the extent that the aggregate of such contributions exceeds 0.5 percent of the taxpayer's contribution base for the taxable year." IRS Publication 505 (2026) puts it plainly: "Beginning in 2026, if you itemize, you can only deduct charitable contributions that are more than 0.5% of your adjusted gross income." On $400,000 of AGI, the first $2,000 of gifts each year produces no deduction.
The floor applies once per year, whatever the number of gifts. That gives bunching a new advantage: three years of giving packed into one DAF contribution pays the floor once instead of three times. Amounts disallowed by the floor carry forward only from years in which your contributions also exceed the percentage-of-AGI limits, under the carryover rule in section 170(d)(1)(C). For most donors, the floor amount is simply lost. Our guide to the redesigned Schedule A and the 0.5% charitable floor shows where it appears on the 2026 form.
Rewritten section 68 reduces itemized deductions by 2/37 of the lesser of total itemized deductions or the amount by which taxable income (with itemized deductions added back) exceeds the start of the 37% bracket. Publication 505 describes the 2026 version as a reduction of "5.4% of the lesser of (1) your total itemized deductions or (2) the amount your taxable income is more than" $768,700 for joint filers or $640,600 for single and head of household filers. The effect is that a dollar of itemized deductions saves about 35 cents of tax instead of 37 cents for someone in the top bracket. It applies to all itemized deductions together, after the charitable floor.
Starting in 2026, people who take the standard deduction can deduct up to $1,000 of cash gifts ($2,000 on a joint return). The IRS Working Families Tax Cuts provisions page is direct: "Certain contributions - including donations to donor-advised funds and supporting organizations - do not qualify." Section 170(p) excludes contributions made "for the establishment of a new, or maintenance of an existing, donor advised fund." The gift must also go to a public charity described in section 170(b)(1)(A), so a private nonoperating foundation does not qualify either. Only cash counts, and stock does not qualify. Standard-deduction filers should give cash directly to an operating charity. Our explainer on the charitable deduction for non-itemizers covers its other conditions.
This example is illustrative. A married couple files jointly with AGI of $400,000 in each of 2026, 2027 and 2028. Their other itemized deductions (state and local taxes and mortgage interest) total $24,000 a year. They normally give $15,000 a year to charity, and they own stock worth $45,000 that they bought for $15,000 more than a year ago. For simplicity, the 2026 standard deduction of $32,200 from Revenue Procedure 2025-32 is assumed for all three years, since later amounts aren't published yet.
| Plan A: give $15,000 cash each year | Plan B: give $45,000 of stock to a DAF in 2026 | |
|---|---|---|
| 0.5% floor each itemizing year | $2,000 | $2,000 (2026 only) |
| 2026 deduction | $24,000 + ($15,000 - $2,000) = $37,000 | $24,000 + ($45,000 - $2,000) = $67,000 |
| 2027 deduction | $37,000 | $32,200 standard |
| 2028 deduction | $37,000 | $32,200 standard |
| Three-year total | $111,000 | $131,400 |
| Gifts lost to the floor | $6,000 | $2,000 |
Plan B produces $20,400 more in deductions over three years. Taxable income stays between $211,400 and $403,550 in every year under both plans, which is the 24% joint bracket in Revenue Procedure 2025-32, so the extra deductions save about $4,896 of federal income tax (20,400 x 24%).
The stock gift adds more. Selling the shares would have produced a $30,000 long-term gain. Their taxable income is below the $613,700 top of the joint 15% capital gain band for 2026, so the gain would have cost $4,500, plus $1,140 of net investment income tax because their income is above the $250,000 joint threshold. Contributing the shares avoids $5,640 of tax on the gain. The $45,000 gift is also well under the 30% limit for appreciated property ($120,000 at this AGI).
The couple then recommends $15,000 of grants in each of 2026, 2027 and 2028, so the charities receive the same money on the same schedule. A big deduction in one year can change your safe-harbor math, so revisit quarterly estimated tax payments after you fund the account.
For a top-bracket household, run the section 68 cap alongside this. Take a joint filer with $100,000 of itemized deductions and $1,100,000 of taxable income before those deductions. The excess over $768,700 is $331,300, so the reduction is 2/37 of $100,000, or $5,405. The remaining $94,595 of deductions saves $35,000 at 37%, which is exactly 35% of the $100,000 claimed.
These excise taxes fall mainly on the sponsor and its managers, and section 4967 can also reach you.
Section 4966, taxable distributions. A distribution from a DAF to any natural person is a taxable distribution. So is a grant to an entity for a non-charitable purpose, or a grant to an entity outside the exceptions where the sponsor does not exercise expenditure responsibility. Grants to public charities described in section 170(b)(1)(A) (other than disqualified supporting organizations), to the sponsor itself, or to another DAF are excepted. The statute imposes "a tax equal to 20 percent of the amount" on the sponsor, plus 5% on any fund manager who knowingly agreed, capped at $10,000 per distribution. On a $50,000 taxable distribution, that is $10,000 for the sponsor and $2,500 for a knowing manager.
Section 4967, prohibited benefits. If a donor, advisor or related person advises a grant that gives any of them "a more than incidental benefit," section 4967 imposes "a tax equal to 125 percent of such benefit" on the person who advised or who received the benefit. A fund manager who knowingly agrees owes 10% of the benefit, capped at $10,000. No 4967 tax applies if section 4958 tax has already been imposed on the same distribution. As an illustration, a grant that buys a donor $2,000 of gala dinner value would mean a $2,500 tax for the donor and $200 for a knowing manager.
The statute does not define "more than incidental." In Notice 2017-73, Treasury and the IRS said they were considering proposed regulations under which DAF payments for tickets that let a donor attend a charity event would be a more than incidental benefit, while a grant the charity treats as fulfilling a donor's pledge would not be, provided the sponsor "makes no reference to the existence of any individual's pledge when making the DAF distribution." These are proposed approaches, and many sponsor policies are stricter.
Related rules. Section 4958 treats any grant, loan or compensation from a DAF to a donor, advisor, family member or 35%-controlled entity as an excess benefit transaction, which our article on Section 4958 excess benefit transactions explains in detail. Section 4943(e) applies the private foundation excess business holdings rules to DAFs, which matters when a family contributes shares of its own company.
| Feature | Donor-advised fund | Private nonoperating foundation |
|---|---|---|
| Cash deduction limit | 60% of AGI | 30% of AGI |
| Appreciated capital gain property limit | 30% of AGI | 20% of AGI |
| Annual excise tax on investment income | None at the fund level | 1.39% of net investment income (section 4940) |
| Required payout | No statutory minimum | Based on 5% of noncharitable-use assets (section 4942) |
| Grants to individuals | Taxable distribution under 4966 | Travel and study grants allowed under procedures approved in advance by the IRS |
| Counts for the non-itemizer deduction | No | No |
A foundation gives the family direct control through its own board. A DAF costs less to run and supports higher deduction limits. Some families use both. A family thinking about starting its own public charity instead faces different rules, from the Form 1023-EZ application to the public support test the charity must keep passing to avoid private foundation status.
Donors aged 70½ or older often compare a DAF with a qualified charitable distribution from an IRA. A QCD is excluded from income, so the 0.5% floor and the section 68 reduction do not touch it, and IRS Notice 2025-67 raises the annual QCD limit from $108,000 for 2025 to $111,000 per person for 2026. Section 408(d)(8) excludes any donor-advised fund as a QCD recipient, so the two strategies run side by side. Many retirees use QCDs for annual giving and a DAF for appreciated stock.
Your DAF contribution lands on Schedule A, so read up on itemized deductions on Form 1040 before deciding whether bunching gets you over the standard deduction. Families with concentrated stock, business sale proceeds or several entities can fold the DAF decision into broader tax filing strategies for high-net-worth individuals.
Can I take money back out of a donor-advised fund? No. The contribution is irrevocable, and the sponsor holds exclusive legal control. You keep advisory privileges over investments and grants only.
Is a DAF contribution deductible if I take the standard deduction in 2026? No. The new $1,000 ($2,000 joint) deduction for non-itemizers excludes gifts to donor-advised funds and supporting organizations. Give cash directly to an eligible public charity to use it.
How does the 0.5% floor affect a DAF gift? If you itemize, the first 0.5% of your AGI in total charitable gifts for the year is not deductible. A single larger DAF contribution in one year meets the floor once, which is why bunching works well under the 2026 rules.
Can a DAF grant pay for my gala tickets or a school tuition bill? Generally no. A grant that gives you a more than incidental benefit can trigger a 125% tax under section 4967, and grants to individuals are taxable distributions under section 4966. Pay for tickets with personal funds.
Do donor-advised funds have to pay out a set amount each year? Federal law sets no minimum payout for DAFs. Many sponsors have their own inactivity policies that can redirect an account balance if no grants are recommended for several years.
Madras Accountancy supports individuals, families and CPA firms with tax preparation, bookkeeping and advisory work, including charitable deduction planning on Schedule A and records for appreciated stock gifts. To talk through your 2026 giving plan, contact our team.
The section 4960 excise tax is 21% of nonprofit pay over $1M. From 2026 it covers all employees. See the medical carve-outs, Form 4720 and a worked example.
The paid family and medical leave tax credit is permanent from 2026. See the 12.5% to 25% rates, the premium option, the 6-month rule and how Form 8994 works.
Opportunity zones become permanent in 2027 under the One Big Beautiful Bill. See the new deferral, rural bonus, and the 2026 handoff.
