Set up a family foundation and receive a charitable deduction up to 30% of AGI
Do I Qualify for the Private Foundation?
To qualify for tax deductions to a private foundation, donations may be cash or property and the foundation itself must meet rules and requirements based on the type of private foundation it is. For instance, donations to private operating foundations may provide tax deductions equal to 50% of the taxpayers adjusted gross income.
2022 Private Foundation Details
A private foundation is any non-church charitable organization that does not file the required forms to be treated as a public charity.
Donations and contributions to a private foundation are tax deductible, but are limited to 30% of the taxpayer’s adjusted gross income for the year, as opposed to the 60% AGI limitation for cash contributions to public charities. For donations of securities or appreciated assets, the limit is reduced to 20% of AGI. Contributions in excess of the allowable deduction can be carried over for 5 years.
Wealthier individuals may be interested in a private foundation over a donor advised fund or donations to a public charity for multiple reasons. Unlike either of the other options, the taxpayer retains full control over the charitable funds until they are distributed. It is also a true legal entity which can employ others, including family members. The taxpayer will have complete control of setting the board, when and who to make distributions to, and who runs the day to day operations of the foundation. There is also the consideration of public goodwill gained by establishing a named family foundation.
From an estate planning perspective, private foundations allow for a taxpayer to shift significant assets out of their taxable estate while also benefiting from a charitable deduction. A more sophisticated option can be setting up certain charitable trusts that also qualify as private foundations.
Private donations do have drawbacks. Under current regulations, private foundations are required to distribute at least 5% of their charitable assets each year. As mentioned, the deduction allowed is limited to 30% of the taxpayer’s AGI for the year. Private foundations are also subject to the 1.4% net investment income tax, unlike a donor advised fund. There are also more regulatory and compliance requirements that the taxpayer will be personally liable to fulfill. Finally, some states have additional requirements if a foundation intends to solicit charitable donations from others.
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•Charitable deduction in the year the contribution is made to reduce taxable income
•Excess amounts can be carried over the next 5 years to offset income
•Can be used in coordination with other charitable strategies
•Taxpayer retains more control than in many other charitable strategies
•Typically allows the taxpayer to have a greater impact on specific causes and generates public goodwill
•Limited to 30% of AGI as a charity deduction
•Must distribute 5% of foundation assets every year
•More regulation and requirements for the taxpayer
•Investments may be subject to the NIIT
Assumptions When Taking the Private Foundation
•Foundation is a qualifying charity.
•Donations will be made in cash.
Requirements to Claim the Private Foundation
•Must have a board of directors
•Must distribute at least 5% of charitable assets each taxable year
•Expenses and expenditures must further the stated charitable purpose
•Must have specific rules to avoid self-dealing
Business Entities That Can Claim the Private Foundation
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.