by David Levitt, Attorney & Principal, Adler & Colvin, San Francisco
Every tax season, Americans gather their records for the year, including receipts for charitable contributions. For those who conduct their charitable giving through a donor advised fund, the gift is eligible for a federal income tax deduction in the year in which the contribution to the donor advised fund is made. The donor may take this deduction only once; an additional deduction is not available when a distribution is made from the donor advised fund to another charity.
Acknowledgment letters from the recipient charities can cause some confusion. The donor should have received a tax receipt following his or her initial gift to the donor advised fund. Charities nevertheless may wish to thank the donor who recommended the gift. In that case, the charity should clarify in its acknowledgment letter that the gift was received from a donor advised fund.
For instance, the charity’s letter could include the following sentence: ” Thank you for recommending a distribution of $[dollar amount] that we received on [date] from [the [insert name of fund] / a] donor advised fund at [name of DAF sponsoring organization].”
This sentence should clarify for the donor or his or her accountant that the gift is from a donor advised fund and therefore not deductible. The charity could go one step further and provide additional clarification: ” Because this gift was made from a donor advised fund, this letter is not a written acknowledgment of a charitable contribution for federal tax purposes; the donor advised fund sponsoring organization should have provided you with a tax receipt for your earlier donation to the fund.”
Unfortunately, some donors simply collect and provide their accountants all of the thank you letters that they receive throughout the year. Because some charities are not clear in their letters and reference the tax deductibility of the donation, an accountant unknowingly and inadvertently may include these amounts in the donor’s total tax-deductible contributions for the year.
While it is good practice for charities to send thank you letters to their donors, charities are not required to provide any letter to a donor advisor or to the donor advised fund sponsoring organization. If a letter is provided, it should not suggest that the donor advised fund grant is eligible for a deduction. Donors, for their part, should read these letters and not submit them as tax receipts for an additional tax deduction when a donor advised fund grant is recommended.