Tax Advantages of a Private Foundation

Donations to a private foundation are tax deductible. However, it is important to understand that monies are not necessarily going directly to charity immediately. The private foundation is only required to distribute 5% of its asset value per year to charity. Therefore, the IRS has establish limits on how much of your charitable deduction can be used in any particular year.

The charitable deduction limit is set at 30% of adjusted gross income (AGI) for cash donations to the private foundation.

Appreciated securities are set at a limit of 20% of adjusted gross income (AGI)

Let's look at an example:

Franklin and Eleanor Roosevelt own highly appreciated stock in a company that Franklin worked for over the past 40 years and a has recently retired. The stock is currently worth $4,500,000 with a cost basis of just $350,000. The current annual dividend yield on the stock is at 1.24%

The Roosevelt's are also very active with several local charities in their community and do plan to leave a portion of their assets to charity.

The Roosevelt's decide to sell $3,000,000 of the stock in order to diversify their holdings and also to reinvest the proceeds into assets designed to produce income to help meet their needs now that they are retired.

They are currently faced with a long-term capital gains tax of 15% federal and 7.25% state for a total of 22.25%. Note that state taxes vary and that a deduction for state taxes is available for write off on the federal return. For our example we will assume a total tax on the sale due of $591,300.

At the same time the Roosevelt's decide to establish a Private Foundation and donate $1,500,000. This contribution of the stock to the Private Foundation will generate a charitable tax deduction of $1,500,000 but is limited to being written off at 20% of the Roosevelt's Adjusted Gross Income (AGI) for the current tax year. They are also permitted to carry forward any of the unused deduction for an additional 5 tax years. So, assuming that the Roosevelt's have their standard income of $200,000 per year plus the additional income of $3,000,000 from the stock sale for this year their income is $3,200,000 for the current year. That will generate a tax deduction in the current year of $300,000 which is 20% of the $3,200,000 Adjusted Gross Income Amount. That deduction can then be used to offset some of the taxes due from the capital gains tax due on the stock sale.

The above example is solely for illustration purposes. Taxes vary by state and tax laws change. Please consult a qualified tax professional for specifics regarding your individual situation. Also note that contribution of appreciated stock to a private foundation may also be subject to a 1 to 2% excise tax.

Click here to receive a FREE copy of our Private Foundation Planning Guide. It contains more details on the tax deduction limitations for a private foundation.

Tactical Wealth Advisors, LLP

Investment advisory services are provided through Tactical Wealth Advisors, LLP a Registered Investment Advisor. The information contained on this site is for educational purposes only, it is not intended to be professional tax or legal advise; consult a tax advisor about your specific situation.