Things have certainly picked up for us here at Roberts CPA Group … we can already tell that we will be quite busy from now until April .

Regardless, just a little bump that it would be a very good idea to get on our calendar as soon as you’re able: 

We’re not the only one who noticed that tax season is picking up.

Tax filing season is underway in the United States, with the deadline for individuals to file their federal tax returns set for April 15th, 2023. The IRS has started accepting electronic tax filings and paper filings.

That’s a paragraph authored by the new ChatGPT AI tool. It obviously missed on the accurate date part (APRIL 18TH is this year’s finish line for federal returns), but I have to admit it sounds like an actual human wrote it — a little vanilla perhaps, but pretty amazing for a robot. 

But the truth is, it’s predicated on pulling writing patterns from the internet and mimicking them. Which means, it will always lack real human-to-human (H2H) quality in its compositions. 

And there’s a lesson in here about AI and electronic software doing the work of real humans: as a tax professional whose world is consistently being encroached on by the big bad TaxAct and TurboTax softwares, I know that what we bring to the table isn’t just mimicry and guesswork.

We bring expertise gained through real experience and human interaction. I not only know the tax code but I’m motivated to help my Louisville clients practically – and sometimes, emotionally – weed their way through tax complexities (and difficulties). And that’s what I offer to you. So, when you’re ready, let’s get a time scheduled to take care of your 2022 tax reporting and even look ahead to 2023.

For my Note today, I want to take a look at a charitable giving concept that high-income earners might consider: private foundations. It has its tax benefits (though that’s maybe not the main reason you should choose this option). It’s a unique animal, but worth taking a look at.

If you’re not in the high-end earnings group, there are still some helpful insights in here for any tax bracket on charitable giving practices and the tax code. 

Let’s take a look…

Roberts on Private Foundations as Giving Strategies
“In charity there is no excess.” – Sir Francis Bacon 

If you take your giving seriously, you might wonder about starting a foundation. Many of the upper-class well-to-do’s have’em, and private foundations offer a host of tax and financial benefits both long- and short-term – not to mention the warm fuzzies that result from giving back. 

BUT… You’d better tick a lot of boxes to make sure your foundation (or any foundation you give to) gets you all the tax breaks you deserve. 

Let’s acquaint ourselves with those details for anyone looking to strike ground on their own private foundation.

Definitions: general and specific

We hear a lot about “foundations,” usually in connection with the famous and ultra-rich (think Bill and Melinda Gates, Rockefeller, or J. Paul Getty). The Council on Foundations says a foundation is an entity that supports charitable activities by making grants to unrelated organizations or institutions or to individuals. Some give money or grants directly, some oversee their own charities. 

Private foundations are generally supported by just a few people or groups, maybe individuals, families, or corporations. Private foundations must pay out at least 5% of their assets annually; this can be in the form of grants and charitable activities. 

The IRS definition: “Every organization that qualifies for tax exemption as an organization described in section 501(c)(3) is a private foundation unless it falls into one of the categories specifically excluded …” 

Private foundations file their annual tax return using IRS Form 990-PF. These returns – and some consider this a drawback – are subject to public disclosure. 

Some of the breaks

First thing first: It’s a bad idea to make a philanthropic financial (or almost any financial move, for that matter) just for the tax benefits. But three do potentially come with a private foundation: 

  • reduced income tax liability in the year you make contributions; 
  • avoiding capital gains on the sale of appreciated assets donated to the foundation; and 
  • reduction or elimination of estate taxes. 

Donated assets also become a tax deduction (up to a percentage of your adjusted gross income) if you itemize on your return, including stock, cash, and real estate. The deduction limits vary, so it pays to donate strategically to help your tax situation – we can help with the math. 

Assets held by a private foundation also grow tax-advantaged based on an excise tax on net investment income that’s way less than capital gains or income tax: just 1.39% and some exempt operating foundations may not owe any tax. 

Here come the terms

Private foundations sound like they’ve got it made tax-wise, and they do – if they’re structured right and behave themselves in the eyes of the IRS. In fact, the IRS promises more attention to high-net-worth taxpayers in general, including those involved in tax-advantaged vehicles (with a staffing shortage, it remains to be seen just how much they can follow through on this particular promise). 

Running private foundations is complicated and loaded with such IRS restrictions as those against “self-dealing” of property, compensation, and other assets between the foundations and substantial contributors. Private foundations must also be extra careful about the number of business holdings and investments and spending that compromise the charitable purposes the foundation is for. 

Fudging these and other rules opens the door to extra taxes and penalties against the foundation and sometimes its managers, big contributors, and others.

A lot of risk and work just for tax avoidance, frankly – philanthropy has to be the main reason

What if your name isn’t Rockefeller?

Private foundations created with less than about five million may not be worth the hands-on administrative labor, experts say. You’re likely best off looking for a third-party administrator for your foundation. 

Other alternatives: 

  • A donor advised fund is an easier and increasingly popular vehicle to give to charity and get tax breaks in return, such as the ability to bunch deductions into one year while maintaining a steady flow of money to a cause. Deduction limits are generous, too. 
  • Organizations like the National Christian Foundation offer access to a “supporting organization,” a qualified and tax-exempt public charity that allows grantmaking to charitable organizations. It’s similar to a private foundation but with the same tax advantages as gifts to a donor-advised fund or directly to another charity.

Desires do often come from the heart – and come with tax and money considerations. We’re always here to help if you’re ready to take the plunge into a larger charitable donation structure like a private foundation, or if you’re looking to implement some charitable giving strategies for Louisville needs you want to pour into on a smaller scale this year. 

Oh, and I’ll make sure your tax situation is set up as well.

On your team

Kevin Roberts