The Tax Benefits of Foundations: How Your Charitable Giving Can Create a Legacy
Published October 28, 2022

The Tax Benefits of Foundations: How Your Charitable Giving Can Create a Legacy

Donating to a cause you believe in is rewarding—knowing you are helping others and making the world a better place. Having the ability to improve the lives of others is, to many people, a privilege and one that comes with a sense of obligation. Establishing a private foundation allows family and friends who are already giving to charity to work together to make a greater impact, introduce children to the importance of giving (or generosity), and create a lasting legacy.

What Is a Private Foundation? 

It is a not-for-profit entity that can be controlled by a person, family, or business. Sometimes private foundations are referred to as “family foundations.” In practice, a private foundation is a unique planned giving vehicle allowing donors to receive an immediate tax deduction for charitable donations made in the future.

Why a Foundation?

High-net-worth individuals and families with sufficient monetary resources and strongly rooted charitable intentions often establish private foundations, typically allowing a select number of people to fully fund the foundation, while retaining complete control over the direction of the philanthropic mission and grants.[1]

Private foundation types include:

  • Independent foundations
  • Family foundations
  • Corporate foundations
  • International foundations
  • Private operating foundations

Other entity options for giving include:

  • Community foundations
  • Donor-advised funds (DAF)
  • Common fund
  • Supporting organizations
  • Charitable trusts (foundation)

What Are the Tax Benefits of a Foundation?

Private foundations are exempt from federal income tax because they are charitable organizations. This means foundations’ investment earnings, capital gains, and certain other types of income are not subject to income tax. While not subject to income tax, a foundation’s investment income is subject to a 1-2% excise tax. This tax ensures that a foundation’s activities and investments are directed in furtherance of a charitable purpose.

Contributions a donor makes to private foundations are generally tax deductible. The amount deductible is determined by the donor’s adjusted gross income and the nature of the property contributed. The amount of a deduction for cash contributions is limited to 30% of the donor’s adjusted gross income. Contributions of capital gain property, including gifts of appreciated stock, are generally deductible to the extent of 20% of the donor’s adjusted gross income.

What Are the Regulations?

There are stringent regulations applicable to running a private foundation. Navigating these regulations can be difficult without the help of professionals. Failure to distribute assets and undistributed income, along with poor management of investments and short- and long-term needs of the foundation, to name a few, will result in additional taxes imposed on the foundation.

In Closing

There are advantages and disadvantages to establishing foundations or employing the other aforementioned entity options. Utilizing these options can be a strategic part of a comprehensive tax and estate plan and afford tax benefits. Perhaps the most important benefit is that a foundation provides multi-generational support to a chosen cause and establishes a legacy of giving that carries the family name. 

If you would like to speak with a tax professional about starting a foundation, or about any matter involving tax planning and strategy, one of our executive contacts would be happy to assist. You may email them below, or call (800) 270-9629.

[1] Tsai, K. F. (2022, July). Going Public: Turning Your Private Foundation into a Public Charity. Journal of Taxation.

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