The Basics of a Michigan Private Foundation (Part 2) -- Tax Treatment of Contributions to Private Foundations
Private foundations receive favorable tax treatment. Donors receive an income tax deduction for lifetime contributions and an unlimited estate tax deduction for bequests at death. In addition, the earnings grow tax free. The income tax deduction on contributions to private foundations is subject to certain percentage limitations against adjusted gross income and is dependent upon whether the gift is cash or appreciated property.
Below is a comparison of the tax advantages of private foundations versus public charities:
Cash. A donor can deduct cash gifts to a private foundation up to 30% of adjusted gross income. Cash gifts to a public charity are deductible up to 50%.
Appreciated Property. Gifts of appreciated property to a private foundation (stock, real estate) are deductible up to 20% of adjusted gross income. The amount of the deduction is generally limited to basis. By contrast, the fair market value of appreciated property donated to a public charity is deductible up to 30% of adjusted gross income. The Taxpayer Relief Act of 1997 granted private foundations favorable tax treatment (deduction equal to fair market value vs. basis) if publicly-traded stock is contributed to a private foundation by June 30, 1998.
Carryover. The donor is entitled to a 5-year carryover in excess of the percentage limitations following the year of contribution.
In my next post on this subject, I'll discuss a nifty exception to these tax rules that allows you to set up a private foundation, with all of the tax advantages of a public charity.
