A private foundation can be a wonderful vehicle for charitable giving, adding focus and impact to a family’s philanthropy and often perpetuating it in future generations. But a maze of tax rules complicates matters. Some regulations cover foundation basics—how tax deductions are calculated and what proportion of assets must go to charity each year. Others, however, are more obscure.
Not only are there rules about almost every aspect of running a foundation, but, according to David Leibell, senior wealth strategist for UBS Financial Services, Inc., “When you’re administering a foundation, you have to be aware of all of these rules.” It’s essential to know what’s required—and what’s not allowed.
Limits on tax deductions for donations
Private foundations are set up as tax-exempt organizations, and you receive an income tax deduction for your contributions that fund it. But there are limits on how much you can deduct each year.
If you contribute cash, you’re allowed to write off a maximum of 30% of your adjusted gross income for the tax year when you make the donation. If you earned $300,000, the most you could deduct would be $90,000. But you can also deduct another 30% of your adjusted gross income the following year, and you have five years to write off as much of your donation as possible.
- Private foundations are subject to a maze of complex tax regulations.
- You can receive income tax deductions for your contributions to your foundation, but the amount you can deduct has a yearly limit.
- Rules are even more restrictive when you’re contributing assets other than cash to a foundation.
- Foundations require that you distribute 5% of the foundation’s assets each year—or face a tax penalty.
- Always run any of your foundation’s proposed transactions by your legal counsel to be sure they won’t run afoul of technical tax rules.