CWG Insight Series: Proposed Tax Bill Could Hurt Charitable Giving

Several of our wealthy families utilize Private Foundations and Donor Advised Funds as the vehicles to pursue their philanthropic endeavors.

A Private Foundation is an independent legal entity set up solely for charitable purposes. Unlike a public charity, which relies on public fundraising to support its activities, the funding for a private foundation typically comes from a single individual, a family, or a corporation, which receives a tax deduction for donations.

A Donor Advised Fund is a giving account established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. Donors can contribute to the fund as frequently as they like, and then recommend grants to their favorite charitable organizations whenever it makes sense for them.

In early April, President Joe Biden released his budget request for the 2023 fiscal year, outlining his tax and spending agenda for the year ahead. This year, there are several proposals that could impact donors and their charitable giving.

Under current law, private foundations (PFs) are required to pay out at least 5% of their assets each year to public charities in exchange for their tax-exempt status and preferential treatment.

Sometimes, PFs make grants to donor-advised funds (DAFs). Currently, those grants to DAFs count toward that 5% payout because all DAF-sponsoring organizations are considered public charities.

A provision in the president’s budget request would significantly limit PFs' ability to use DAFs and still meet their payout requirement. If enacted, it will allow PFs to count DAF grants toward their 5% payout only if they grant the money out from the DAF by the end of the following tax year and keep a clear record of the transaction.

Unfortunately, this could lead to changes in grantmaking that aren’t all positive. If PFs are discouraged from using DAFs, we could see less collaboration, less informed grantmaking and hastier projects.

Biden’s budget request included a number of changes that would increase taxes on wealthy taxpayers and, consequently, how much money they have to give to charity and the cost of that charitable gift:

• Increasing the top individual income rate to 39.6%, up from 37%
• Creating a minimum income tax of 20% for households with more than $100 million in wealth, to be levied on income and unrealized capital gains
• Ending stepped-up basis at death for capital gains in excess of $5 million
• Taxing long-term capital gains at the top individual income rate for taxpayers with taxable income of more than $1 million.

All of these changes stand to impact the amount, the timing and the types of charities wealthy donors will give to. On the one hand, the above tax increases technically decrease the “cost” of giving to charity. On the other hand, higher taxes mean donors have less money in their pocket to give, which makes charitable-giving incentives and flexibility of giving vehicles even more important to encourage more giving.

Biden’s budget request is simply a tool to outline his tax and spending priorities for the year, and it would take a lot of work to get one, let alone several, of these provisions enacted into law. This budget does signal, however, what the president and the Democratic Party might focus on in the next year. And with the election coming up, lawmakers will be looking to advance proposals to show their voters they can get things done in Washington. Let’s hope those that could reduce charitable giving remain out of reach.

Nick Kolbenschlag
Chief Executive Office & Co-Founder