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
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.
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copy of our Private Foundation Planning Guide. It contains
more details on the tax deduction limitations for a private
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.