• Nonprofit organizations form the bedrock of civil society, representing a longstanding tradition of voluntary associations that operate independently from government control to meet community needs.
• A constitutionally protected right to associate is part of the fabric of our society. The tax-exempt status of nonprofit organizations allows charities to operate with a degree of independence from government control.
• Recent proposals to tax nonprofits like for-profit businesses overlook fundamental differences between the sectors, such as nonprofits’ mission-driven focus and reinvestment requirements and could harm smaller organizations providing vital services.
• Nonprofits use their net income to build reserves, reinvest in programs, upgrade infrastructure, develop staff, repay debt, plan for future growth and comply with donor restrictions, all of which support their charitable missions.
• Rather than imposing broad tax reforms on nonprofits, a more nuanced approach should focus on reviewing federal funding for large nonprofits with substantial endowments and reviewing existing community benefit standards for nonprofit hospitals.

From Insight to Impact: Examining Proposed Tax Changes for Nonprofits

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How Tax Policy Affects Charitable Giving

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Since the Tax Reform Act of 1969, private foundations have operated under strict regulations enforced by the Internal Revenue Service (IRS). Central to these regulations is the 5% minimum distribution rule, which mandates that foundations distribute at least 5% of their assets’ fair market value each year to qualified charitable organizations. This rule serves a dual purpose: ensuring immediate contributions to charitable causes while allowing foundations to sustain long-term support for their chosen beneficiaries.

Over time, foundation giving has become increasingly significant, accounting for a growing share of total charitable donations. From comprising 11% of total charitable giving in 2000 to 21% in 2022, foundation grants have become a lifeline for numerous charitable organizations, supporting missions that would struggle without such essential funding.

Critics of the current regulatory framework have proposed raising the payout requirement to 10% or even 12% of private foundation funds. However, using the Ford Foundation as an example, this analysis reveals the potential detrimental consequences of such a change. While a higher payout requirement might initially result in larger grants to charities, it would lead to rapid depletion of foundation assets, ultimately diminishing long-term support for charitable causes.

A fifty-year projection comparing foundations adhering to the 5% rule with those subject to a 12% payout requirement underscores the significant impact on grantmaking capacity. Foundations following the 5% rule contribute nearly $21 billion more to charity over the simulation period. This highlights the importance of maintaining a balance between short-term impact and sustained, meaningful contributions to charitable causes.

Furthermore, the analysis extends to the perspective of large charities, such as St. Jude Children’s Research Hospital, emphasizing the tangible implications for organizations dependent on long-term foundation support. While the 5% rule enables consistent and substantial assistance, a higher payout requirement could result in a sharp decline in funding after an initial surge, providing only a fraction of the needed long-term support.

In navigating discussions around private foundation regulations, it is crucial to consider the delicate equilibrium established by the current regulatory framework. The 5% minimum distribution rule optimizes immediate philanthropic impact and enduring support for addressing complex societal challenges, reflecting the nuanced interplay between short-term needs and long-term sustainability in philanthropy.

What Higher Foundation Payout Rules Would Mean for Charities

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• Potential reversion to pre-TCJA tax provisions could significantly alter the tax burden for various income groups, impacting donor behavior and trends in giving. On net, higher taxes means less disposable income, which is directly tied to charitable giving.
• Some changes pose challenges and opportunities for philanthropy, such as lower limits for charitable deductions, lower deduction thresholds for charitable bequests, and changes to the standard deduction.
• While tax policy is under discussion, lawmakers should look at ways to incentivize charitable giving, like allowing 401(k)/403(b) rollovers to donor-advised funds.
• Risks to philanthropy are also on the table during these debates, including potential limits on charitable deductions or new taxes on nonprofit endowments and individual wealth. Policymakers must carefully balance fiscal objectives with the societal benefits of philanthropy to ensure continued support for charitable organizations and the communities they serve.

This paper outlines the expiring provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 and analyzes how the expiration or extension of various provisions may impact philanthropy in the United States. The importance of a tax code that is conducive to charitable activity and that strengthens the private voluntary sector is widely recognized by Philanthropy Roundtable. An increase in taxes is seen as counterproductive to this goal. While this debate continues, concern exists that recurring attacks on philanthropy, justified by associated revenue figures, may be proposed to “fund” other policy changes. The United States has a free enterprise market system at its core, but wealth creation is increasingly viewed negatively, and those with resources face increased scrutiny.

However, economic dynamism also fuels much of the generous giving that supports our communities, and the charitable causes Americans care about. The tax code should not be used to penalize economic success. Experts, economists, and policymakers are already engaged in discussions about what should happen in 2025.¹ This paper is intended to inform that debate, not to advocate for or against specific provisions.

THE TCJA BROUGHT BIG CHANGES TO THE TAX CODE

Enacted in 2017, the TCJA marked a significant overhaul of the US tax code, amending the Internal Revenue Code of 1986. The provisions of the TCJA came into effect starting in tax year 2018. The TCJA was a major policy priority of the Trump Administration aimed at fueling economic growth, investment, and worker wages. While it delivered permanent reductions in international and corporate taxes, many provisions, notably those impacting individual tax rates, deductions, and exemptions were designed with a “sunset clause,” set to expire in December 2025.² The temporary provisions of the TCJA included reductions in individual income tax brackets for most taxpayers. Table 1 below shows how changes in tax rates and brackets changed for different income bracket tax filers. The income levels listed are for those married filing jointly.

TABLE 1. INCOME BRACKETS FOR MARRIED FILING JOINTLY, BEFORE (2017) AND AFTER TCJA (2018)

OTHER CHANGES TO INDIVIDUAL INCOME TAXES

In addition to changes in individual income tax rates and brackets, the TCJA significantly increased the standard deduction, effectively doubling the amount most taxpayers can subtract from their income before income taxes are applied. The increase in the standard deduction was a notable change because it led to significantly more Americans claiming the standard deduction after the passing of the TCJA. According to IRS Statistics of Income data, 68 percent of tax filers claimed the standard deduction in 2017, while that share increased to 88 percent in tax years 2018 and 2019.³

The tax changes alleviated some of the tax burdens placed on high income earners by significantly reducing the impact of the Alternative Minimum Tax (AMT). The AMT is an alternative measure of taxable income with two tax rates, 26 percent and 28 percent respectively. Filers can deduct up to a certain amount from their alternative minimum taxable income (AMTI) when calculating taxes owed.

The purpose of the AMT is to ensure high earners pay a minimum amount of tax, even if they use many deductions. The TCJA dramatically increased the AMT exemption amount, replacing and enhancing a series of one year AMT patches since 2007. For example, in 2020, the exemption for married couples filing jointly was $126,500, compared to $84,500 before the TCJA. This means many more taxpayers fall below the threshold where AMT even applies.

Additionally, the income level at which the AMT exemption begins to phase out was also significantly increased. In other words, taxpayers can earn more income before they start losing the benefit of the AMT exemption, resulting in potentially lower overall tax liabilities for those affected. For married couples filing jointly in 2024, the phaseout begins at $1,218,700, compared to $160,900 before the TCJA.

CHANGES TO ESTATE TAXES

The TCJA also brought significant changes to estate taxes. Starting in 2018, the threshold for when the estate kicks in, known as the exemption amount, effectively doubled from its original $4.49 million. This figure adjusted for inflation was almost $11.2 million in 2018 and $22.4 million for married couples. This substantial increase significantly reduced the number of estates facing taxation and lowered the overall tax burden on larger estates. The total value of estates and gifts beyond this threshold are taxed at a rate of 40 percent.

OTHER CHANGES TO DEDUCTIONS AND CREDITS

As well as changes to individual and estate taxes, the TCJA included significant changes to many deductions and tax credits. For example, the act created a new deduction for self-employed and small business owners to deduct up to 20 percent of their business income if it fell below a certain threshold. The State and Local Tax deduction (SALT) was capped at $10,000 starting in 2018—a popular deduction for those deducting property and income taxes in states with high tax rates and high property prices.

The Child Tax Credit (CTC) was doubled from $1,000 per child to $2,000 per child, while income phase-out thresholds were raised significantly for individuals and couples. The TCJA also repealed personal exemptions and miscellaneous deductions, lowered the mortgage interest deduction, and applied new restrictions on business interest deductions—all of which result in higher tax liabilities for taxpayers who use these deductions and exemptions.

TAXES ON UNREALIZED GAINS

Another controversial provision included in the TCJA was the Mandatory Repatriation Tax (MRT). MRT is a one-time tax on the realized and unrealized growth of certain investments made overseas as part of the transition to a territorial tax system. For cash or equivalents, a tax rate of 15.5 percent is applied.⁴ It is already highly problematic to tax the increased value of an investment, before a taxpayer has received any of the gain in his or her bank account.

Even more controversially, the tax applies to all foreign earnings accumulated after 1986. The imposition of the MRT has raised serious constitutional questions as it is not a tax on income as permitted under the Sixteenth Amendment. The tax has been legally challenged and is currently under review by the Supreme Court. If the MRT is upheld, then it could open the door to a variety of future taxes on unrealized gains that may chill effective philanthropy.⁵

TAX BURDEN GENERALLY

Aside from the effects of individual expiring provisions on philanthropy, a general increase in the tax burden for most Americans could dampen charitable giving. This is because charitable giving is closely correlated with economic markets and national income growth, so less economic activity results in less charitable generosity than would otherwise be the case.⁶ The academic literature on this topic finds that every percentage point reduction in marginal income tax rates leads to about a 0.78 percent increase in gross domestic product (GDP).⁷

As total charitable donations typically amount to roughly 2 percent of GDP, any increase in the tax burden resulting from expiring TCJA provisions could negatively impact total charitable giving. While the Roundtable does not subscribe to a specific path forward on the TCJA extensions and revisions, it is crucial to ensure the tax burden does not rise — which may arguably provide a near-term increase in giving to avoid taxes but in the long term will undermine support for the charitable sector as incomes contract. The role of the charitable sector is to be a counterbalance to a muscular central government. More tax dollars shifting away from the sector and into the Treasury is a loss for our society.

WHICH TAX PROVISIONS EXPIRE IN 2025?

While changes to corporate and capital gains taxes were permanent under the TCJA, most of the remaining provisions are set to sunset by the end of 2025. The bullet points below list the expiring provisions of the TCJA; what these taxes, credits, and deductions currently look like; and what they will look like if the TCJA is allowed to fully expire at the end of 2025. This list doesn’t include the individual income tax provisions as this was covered in some detail in Table 1 above.

• Standard Deduction: For tax year 2024, taxpayers can deduct up to $14,600 (or $29,200 for married couples filing jointly) from their taxable income. However, in December 2025, this deduction will revert to $6,350 (or $12,700 for married couples), likely leading to higher taxable income for many individuals and families.
• Estate Tax Exemption Threshold: Presently, estates valued up to $13,610,000 (or $27,220,000 for married couples) are exempt from federal estate taxes. At the end of 2025, this exemption threshold will drop significantly to $5,490,000 (or $10,980,000 for married couples), meaning more estates may become subject to estate taxes upon the death of the owner.
• Qualified Business Income Deduction: The current provision allows for a 20% deduction on income below $170,050 for certain business income. However, after 2025, this deduction will be eliminated, likely impacting the tax liabilities of small business owners and self-employed individuals.
• State and Local Tax Deduction Cap: Presently, taxpayers can deduct up to $10,000 in state and local taxes from their federal taxable income. This cap is set to be eliminated after 2025, allowing taxpayers in high-tax states to potentially deduct more state and local taxes from their federal tax returns.
• Alternative Minimum Tax Exemption: Currently, the Alternative Minimum Tax (AMT) exemption stands at $85,700 (or $133,300 for married couples). After 2025 this exemption will decrease to $54,300 (or $84,500 for married couples), potentially subjecting more taxpayers to the AMT and increasing their overall tax liabilities.
• Alternative Minimum Tax Phase Out: Currently, the AMT phase-out threshold is set at $609,350 (or $1,218,700 for married couples). At this level of income, every $1 of additional income above the threshold reduces the exemption amount by 25 cents. In 2025 this threshold will decrease to $120,700 (or $160,900 for married couples), reducing the exemption amount higher-income taxpayers could claim against their AMT tax liability.
• Child Tax Credit (CTC): The current CTC allows for a credit of up to $2,000 per qualifying child. However, at the end of 2025, this credit will decrease to $1,000 per qualifying child, reducing the tax benefits for families with dependent children.
• Child Tax Credit Phase Out: Currently, the phase-out threshold for the CTC is set at $200,000 (or $400,000 for married couples). Once modified adjusted gross income exceeds this threshold, the credit amount received is reduced as income gets higher and then phases out completely. When TCJA provisions sunset, this threshold will decrease to $75,000 (or $110,000 for married couples), likely impacting higher-income families who may not qualify for the full credit.
• Mortgage Interest Deduction: Presently, taxpayers can deduct mortgage interest on loans up to $750,000 from their taxable income. After 2025, this deduction will be limited to mortgages up to $1,000,000, potentially affecting homeowners with larger mortgages.
• Personal Exemption & Miscellaneous: Currently, there are no personal exemptions or miscellaneous deductions available. Starting in tax year 2026, individuals may be able to claim deductions of up to $4,050, potentially reducing their taxable income.
• Personal Exemption Phase Out: Currently, there is no phase out for personal exemptions. However, starting in tax year 2026, the phase-out threshold for personal exemptions will be set at $261,500 (or $313,800 for married couples). For each $2,500 of income above the threshold, the personal exemption amount is reduced by 2% and phased out altogether for incomes above $436,300.
• Charitable Contribution Deduction: Presently, taxpayers can deduct cash donations up to 60% of their adjusted gross income (AGI). At the end of 2025, this deduction will be limited to 50% of AGI, potentially impacting the tax benefits of large charitable donations.
• Corporate Interest Deduction: Currently, corporations can deduct up to 30% of their earnings before interest. By 2025, this deduction will be eliminated, potentially impacting the tax liabilities and financial decisions of corporations regarding debt financing.

*With the exception of the CTC and the Mortgage Interest Deduction, most deductions, exemptions, and thresholds will be adjusted for inflation after reversion to 2017 levels to account for changes in the price level since the passing of the TCJA.

As Table 1 and the previous bullets illustrate, most of the reversions to the pre-TCJA tax code would notably raise the tax burden for those who file for each of the listed deductions and credits, as well as most taxpayers who pay income taxes.⁸ At the same time a handful of expiring provisions would reduce the tax burden, namely for those who file for the SALT deduction, mortgage interest deduction, and personal exemption. In terms of philanthropy some of the provisions to watch include changes in the deduction limit, lowering of the standard deduction, and a lower real estate tax threshold.

HOW EXPIRING TAX PROVISIONS MAY IMPACT PHILANTHROPY

Philanthropy plays a vital role in supporting social causes and addressing societal needs. However, donor behavior and giving trends could be impacted by the expiration of key tax provisions. The immediate impact of tax increases may actually be a small bump in charitable giving. However, the sustained health and growth of the charitable landscape relies on economic growth and on taxpayers having more personal resources to give from. In the medium and long run, higher taxes will mean more money for a bloated and inefficient government, and less for the creative, nimble charitable sector. For those who care deeply about our society and the serious challenges we face, higher taxes are the wrong answer.

LOWER DEDUCTION LIMIT MAY CHILL GIVING

One change in tax policy that will impact philanthropy is the decrease in the deduction limit for cash contributions from 60 percent of adjusted gross income (AGI) to 50 percent of AGI.⁹ For example, if a donor with an adjusted gross income of $100,000 donates $60,000 to a public charity, they can deduct that full amount, up to 60 percent of their AGI, significantly reducing their taxable income.

The passage of the TCJA says the 60 percent limit applies to contributions made “in any taxable year beginning after December 31, 2017, and before January 1, 2026.” This change will likely result in a reduced marginal incentive to give, particularly among high-income donors and individuals who strategically donate large sums spaced out over time. A real time experiment in how the deduction limit impacts giving was seen in 2020 when the CARES Act increased the limit from which charitable deductions could be claimed against AGI from 60 to 100 percent.

According to Giving USA data, total giving by individuals reached record high levels in 2020 and 2021, even after adjusting for inflation.¹⁰ Of course, this spike in giving was in response to the COVID-19 pandemic, but it was likely further fueled by the increased tax benefit for giving.

MURKEY IMPACT OF A LOWER STANDARD DEDUCTION

Another expiring provision of TCJA that has been a topic of debate among tax experts is the changes in the standard deduction. Following the passing of TCJA, these changes were estimated to reduce the average marginal tax benefit of charitable giving from about 21 percent to about 15 percent. In other words, the cost of donating an additional $1,000 to charity was $790 pre-TCJA, but post-TCJA the cost was $850. Forecast estimates in January 2018 found the increase in the standard deduction would reduce the number of taxpayers taking the charitable deduction from 37 million to 16 million.¹¹ Based on this analysis, economists forecasted a decline in charitable giving in the neighborhood of 5 percent.¹²

However, the effects on charitable giving of raising the standard deduction are unclear at best. One 2022 analysis found that accounting for state data on charitable deductions, contributions fell by much less than federal deductions alone suggest.¹³ For example, in Colorado, federal itemized returns declined by 16 percent following TCJA, while state charitable deductions doubled resulting in overall declined contributions of just 1 percent.

One explanation for this is that after-tax income increased for most taxpayers post-TCJA, and some of that additional income could have been used for charitable contributions. While tax changes certainly factor into giving decisions, people give for a host of other reasons like belief in organizational mission, making a difference, personal fulfillment, giving back to the community, or supporting your local church.

Another factor preventing a reduction in giving may have been that strong income growth in recent years has pushed people into higher brackets. Both their income and tax burdens have grown over this period. This means they have more money to give and a greater tax incentive to give.

Some research suggests allowing the higher standard deduction to expire could lead to an increase in charitable giving. The argument here is that the smaller standard deduction would encourage more people to itemize, which would include the ability to claim charitable contributions. But as discussed above, while such a change would likely lead to more taxpayers claiming the charitable tax deduction, it is unclear whether this will lead to an actual increase in giving. As giving is tied to disposable income the more important variable to consider is whether people feel less wealthy with a lower standard deduction.¹⁴ If their tax burden rises, they will have lower disposable income and may donate a lower amount as a result, particularly in the long run.

COULD HIGHER ESTATE TAX BURDEN MEAN LESS FOR CHARITIES?

The TCJA offered a significant estate tax cut by raising the threshold for what may be taxed upon death. The scheduled expiration of the higher estate tax exemption threshold is likely to have a notable impact on charitable bequests and donor estate planning. While many assume a higher tax burden for estates will lead to more charitable giving as individuals seek to avoid paying taxes on their estates, such a bump in giving would likely be short-term at best.

The goal of high, punitive estate tax burdens is to forcibly collect the assets of those individuals who have earned and grown their wealth over time. If instead of this wealth going into the government coffers, it remains with family members, that wealth becomes potential charitable resources for generations to come. Americans have a unique tradition of establishing philanthropy as a family legacy.

Whether through family foundations, trusts or donor-advised funds, or other giving avenues, the families of wealth-creators often give generously and are able to respond to challenges that the government cannot or should not. The argument that this long-standing piece of American culture should be discarded in order to give more revenue to the government misses the larger value of charitable giving and civil society.

Currently, the high exemption threshold allows individuals with estates exceeding the limit to donate significant assets without worrying about estate taxes. If the threshold falls, they might be less inclined to make large charitable gifts to maximize the remaining exemption for their heirs. With a lower exemption, more estates would be subject to the estate tax, potentially leaving them with less available for charitable contributions after taxes are paid. Conversely, some individuals might choose to make smaller, but more frequent, charitable donations throughout their lifetime to utilize the annual gift tax exclusion (currently $17,000 per recipient) instead of making large, one-time gifts at death.

TAX REFORM OPPORTUNITIES THAT COULD INDUCE GIVING

While expiring tax provisions will undoubtedly have consequences for charitable giving behavior, there are also opportunities for reform to induce greater charitable generosity among Americans.

The coming decades present a unique opportunity for a surge in charitable giving in the United States. The baby boomer generation, the largest in American history, is now entering its retirement years. This demographic shift presents a unique opportunity for a surge in charitable giving, as they hold significant wealth accumulated in retirement accounts. However, the current tax code poses several obstacles to unlocking this philanthropic potential.¹⁵

Retirement accounts, including traditional IRAs and 401(k)s, house a substantial pool of potential philanthropic resources. Estimates suggest these accounts hold almost $20 trillion, representing a significant opportunity for increased charitable contributions.¹⁶ This influx of resources could have a profound impact on the nonprofit sector, enabling it to address a wider range of social issues and catalyze positive societal change.

Despite the potential for increased giving, the current tax code inadvertently discourages individuals from utilizing retirement savings for charitable purposes. While withdrawals from certain retirement accounts are taxed as income, the tax rates for retirees may be lower than during their working years and thus they may be less likely to itemize and claim a charitable tax deduction. However, directing a portion of these mandated distributions toward charities does not always provide additional tax incentives. While the IRS forces retirees to take distributions from their 401ks after a certain age, if they choose to direct these distributions to charity, they do not receive any tax incentives for these donations.

The tax code offers a partial solution in the form of “qualified charitable distributions.”¹⁷ This provision allows individuals to donate directly to qualified charities from their personal IRAs, bypassing the tax burden on those specific funds. However, as Howard Husock at the American Enterprise Institute has said, this seemingly advantageous feature suffers from a critical limitation: it excludes the much larger pool of funds held in employer-sponsored 401(k)s and 403(b)s. This creates an arbitrary distinction, unfairly penalizing individuals who saved for retirement through their employers’ plans. It is akin to offering tax incentives for giving from one type of bank account while neglecting others, ultimately hindering the flow of potential donations.

The landscape of philanthropy is evolving, with donor-advised funds (DAFs) emerging as a popular tool for strategic giving. These accounts offer several advantages, including an immediate tax deduction for contributions and the ability to invest the assets for future charitable distributions. However, individuals wishing to utilize DAFs for retirement-derived charitable giving face another hurdle. Currently, transferring funds from retirement accounts to DAFs incurs a tax penalty, effectively disincentivizing the use of this popular giving vehicle.

THE SOLUTION: ALLOW CHARITABLE GIVING FROM ALL RETIREMENT ACCOUNTS TO ANY GIVING VEHICLE

To induce charitable generosity from retirees, the scope of qualified charitable distributions could be expanded to allow individuals to make direct charitable contributions from all retirement accounts, including 401(k)s and 403(b)s. This would create a level playing field, removing the current unfair distinction between account types and allowing individuals to utilize their retirement savings for charitable giving regardless of the type of account they hold.

The tax barrier to transferring funds from retirement accounts to DAFs should also be eliminated. This reform would empower individuals to leverage the benefits of DAFs for strategic and impactful giving while utilizing their retirement savings for such purposes. Removing this tax hurdle would foster innovation and flexibility in charitable giving strategies for retirees.

TAX REFORM OFFERS OPPORTUNITY TO EXPAND CHARITABLE TAX DEDUCTION

Another reform that may stimulate charitable giving would be to allow non-itemizers to qualify for the charitable deduction. While many smart tax experts disagree about whether the charitable tax deduction should exist, it does hold a place in our tax code, and should be structured to maximize giving incentives. During the COVID-19 pandemic and economic downturn, non-itemizing tax filers qualified for a charitable deduction up to $300, which was expanded through 2021 with a deduction up to $600 for jointly filed returns. Giving data found a significant uptick in smaller gifts in years when the deduction was implemented.

According to IRS Statistics of Income data, over 42 million additional taxpayers claimed the deduction, resulting in an almost $11 billion boost to charities in 2020 alone.¹⁸ The Fundraising Effectiveness Project found that gifts under $250 grew by 15.3% in 2020 compared to 2019 and noted a 28% increase in $300 gifts, the exact amount allowed for a deduction under prior measures.¹⁹

If the goal is to foster robust charitable giving among all income levels, the associated tax benefits of charitable giving should not be limited to those who itemize their tax deductions. Similar proposals have been made in the past, including a 2023 proposal to create a non-itemizer charitable deduction for those who take the standard deduction, allowing them to deduct up to one-third of the standard deduction.²⁰ While it is not necessary to create an additional charitable deduction, expanding the above-the-line deduction to non-itemizers could boost charitable donations by an estimated $17 billion, according to one analysis.²¹

TAX DEBATE ALSO POSES RISKS TO PHILANTHROPY

As the TCJA expiration approaches, policymakers are increasingly weighing the costs of renewing provisions with the impact on federal budget deficits. Debt held by the public will exceed the size of the entire U.S. economy in 2025, budget deficits are forecast to exceed a cumulative $20 trillion in the coming decade, and these forecasts don’t include the costs of TCJA renewal.²² All of this raises the risk of policymakers seeking to fill the budget gap by turning their attention to the tax-exempt sector in a misguided attempt to raise new revenues.

RISK: RESTRICTIONS ON PRIVATE FOUNDATIONS

In annual budget proposals, the Biden administration calls on Congress to impose restrictions on how private foundations may give through DAFs.²³ Private foundations currently face a federal excise tax if they do not allocate 5% of their assets to charitable causes annually. Critics say when a foundation transfers funds to a DAF without promptly disbursing them to charities, it violates the spirit of the payout requirement. While this practice is rare, and rooted in legitimate purposes, critics say DAF contributions should not count toward fulfilling a foundation’s payout obligation unless the entire contribution is distributed from the DAF by the end of the following year.

For those who share the goal of encouraging a vibrant charitable sector, it’s important to note this argument fails to consider the other valid, legitimate, pro-charity reasons why a foundation may choose to give through a DAF.²⁴ These include pooling resources with other donors, leveraging economies of scale and investment expertise, streamlining administrative and legal processes, and mitigating bookkeeping difficulties.

Another concerning provision that appears in the administration’s budget as well as prior legislation calls for a new restriction on how family foundations can compensate working family members. Put simply, while nonfamily foundations would still be permitted to include their employee expenses when calculating their annual payout obligation, family foundations employing family members would no longer have this option. This is despite available data and studies finding that family foundations spend less on administrative expenses than foundations run by non-family staff.²⁵

RISK: RAISE TAXES ON WEALTHY

The Biden administration also calls for a wealth tax—specifically a 25 percent tax on unrealized gains of those with net assets above $100 million. This isn’t the first such proposal for a tax on wealth. In 2023 Senator Wyden with 18 cosponsors reintroduced the “Billionaire Income Tax” aimed at taxing unrealized gains by 20 percent for those with net worth over $100 million.²⁶

In previous years, other senators have introduced legislation such as the Ultra-Millionaire Tax, which proposed implementing a 3% tax on the net value of assets above $1 billion, including the assets of charitable foundations.²⁷ A tax of this nature could have significant negative impact on philanthropy and charitable organizations.

Taxing unrealized gains means investors would have to pay taxes on the gains they have not yet received, reducing the amount of money available for charitable giving. Considering charitable foundations in the U.S. contributed $105 billion to nonprofit organizations in the previous year, any change in their assets would be consequential. If the foundations experience a notable decrease in their assets, it could have a substantial adverse effect on the communities currently benefiting from those charitable donations.²⁸

In fact, prior analysis has found that imposing a tax on charitable foundation assets would consume between 6 and 25 percent of the annual disbursements of five selected foundations. One analysis by the National Taxpayers Union Foundation concluded that “Foundations would have to either reduce annual giving or draw down their endowments to satisfy their newfound tax liabilities, or some combination of the two. Either way, long-term giving would decrease.”²⁹

RISK: MODIFYING TAX TREATMENT OF CARRIED INTEREST

Biden’s 2025 budget included a proposal to tax carried interest at ordinary income tax rates. Carried interest is, very generally, a share of the profits in a partnership paid to its manager and is taxed at long-term capital gains tax rates typically lower than income tax rates (maximum rate of 20% versus 37%). Current tax law generally exempts donors from recognizing gains when making gifts to charity. That has been a long-standing principle in the tax code and is sound policy: a charitable transfer should not be treated as a realization event because the donor, having parted ways with the asset, has realized no income on which he can be taxed.

The proposed provision, however, would subject donors to substantial income tax even when donating appreciated partnership interests. This could render transferring such interests to charity practically infeasible, particularly for complex assets like private equity often donated through DAFs. Such a change in the tax treatment of carried interest would discourage donors from utilizing DAFs for complex assets, ultimately hindering charitable giving, and impacting the crucial work many organizations depend on.

RISK: CUT GIVING INCENTIVES FOR WEALTHY

In recent reports, progressive advocacy groups have called for restrictions to be placed on the charitable tax deduction. For example, the Institute for Policy Studies has suggested applying a $500 million lifetime cap on the charitable deduction for wealthy donors. To see how this would reduce charitable dollars available to charities who support communities in need, we only have to look at our nation’s biggest donors. Warren Buffett, Bill Gates, and MacKenzie Scott have collectively donated $211 billion to charity in their lifetimes, with Buffett alone donating almost $57 billion over the course of his life.³⁰ Placing restrictions on charitable tax deductions for wealthy donors may result in a significant decrease in charitable donations reaching communities who depend on those funds most.

RISK: TAXING ENDOWMENTS

One area of tax policy where we see policymakers calling for new or higher taxes is on the excise tax applied to the investment income of large college endowments. Since the passing of the TCJA, private nonprofit universities with endowment assets exceeding $500,000 per student have been subject to a 1.4 percent excise tax on their investment income. For Calendar Year 2022, this tax applied to fifty-eight institutions that collectively paid $243.7 million in excise taxes.³¹

However, in recent years policymakers have made proposals to raise the excise tax rate and apply the tax to a broader group of private nonprofit colleges. For example, the Higher Education Accountability Tax Act (H.R.8883) introduced into the House in 2022 proposed raising the excise tax to 10 percent and lowering the endowment threshold to $250,000 per student enrolled.³² More recently, Senator J.D Vance (R-OH) proposed raising the excise tax rate from 1.4 percent to 35 percent for non-religious colleges with endowments greater than $10 billion.³³

While there are certainly systemic problems to be addressed in higher education, it is important to note such changes may impact institutions outside of the large, Ivy League schools facing understandable criticisms. First, lowering the endowment per student threshold means smaller universities, which are not Ivy League colleges, would be taxed on their investment income.

The reduced threshold would impose large taxes on the endowment of smaller colleges such as College of the Ozarks, Boston College, University of Tulsa, and Centenary College of Louisiana to name a few. These targeted endowments also include gifts that have been restricted by their donors for specific purposes. So proposed tax changes would effectively harm generous individuals and students who would have benefited from their philanthropy.

What’s more, a larger excise tax will inevitably discourage higher education donors from making endowment gifts which support scholarships, research, and other educational initiatives. It may also have the unintended consequence of increasing the number of unrestricted gifts which can be used by college and university leaders for adding to administrative bloat and the very DEI programs critics are attempting to address. If the end goal is instead to help close the budget deficit, lawmakers may find it more efficient to instead consider cutting direct funding to the universities with the largest endowments. For example, Harvard University and Yale received $676 million and $777 million in federal funding respectively in academic year 2023.³⁴

While the current debate focuses on college endowments, it opens the door to other types of tax-exempt endowments being subject to new taxes, potentially affecting the philanthropic landscape and educational initiatives beyond the realm of higher education.

CONCLUSION

The TCJA of 2017 brought about significant changes to the US tax code, with both temporary and permanent provisions aimed at stimulating economic growth and investment. While the TCJA provided permanent reductions in corporate taxes and capital gains, many individual tax provisions, including deductions and credits, were designed with expiration dates set for December 2025.

As highlighted in this brief, the potential reversion to pre-TCJA tax provisions could significantly alter the tax burden for various income groups, impacting donor behavior and trends in giving.

The impending expiration of key tax provisions presents challenges and opportunities for philanthropy. Generous Americans may give less if the general tax burden is raised and certain provisions, such as the higher charitable deduction limit, are allowed to expire. Conversely, the forthcoming tax policy debate opens the door for changes that will encourage giving such as allowing for IRA rollovers to donor-advised funds.

While this debate is ongoing, lawmakers should be aware of unintended consequences to philanthropy from proposals like new restrictions on private foundations or wealth taxes. Such proposals would hinder charitable contributions and limit the resources available to support communities in need. Policymakers must carefully balance fiscal objectives with the societal benefits of philanthropy to ensure continued support for charitable organizations and the vital services they provide to communities across the country.

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Mandated disclosures are omnipresent in the United States. Doctors must provide patients with HIPAA disclosures regarding the use of health histories. Members of Congress must publicly disclose details about their personal finances. It is easy to see why such policies are attractive. “Sunlight is said to be the best of disinfectants,” wrote Justice Louis Brandeis famously.

Yet, as Ben-Shahar and Schneider write, “‘Mandated disclosure’ may be the most common and least successful regulatory technique in American law.” This paper explores one form of mandated disclosure— of donors to nonprofit organizations—and assesses the benefits and costs of these types of policies.

Since the U.S. Supreme Court’s decision in Citizens United and a U.S. Circuit Court decision in SpeechNow, campaign finance reformers have focused their attention on disclosure as a means to regulate money in politics. The rise of super PACs which are permitted to raise and spend unlimited amounts on politics made restrictions on contributions to candidates seem ineffectual.

Reformers coined the term “dark money” to refer to the fact that nonprofits organized under section 501(c)(4) of the Internal Revenue Code do not have to disclose their donors publicly (though some donor information must be reported to the Internal Revenue Service).

In recent years, there have been numerous state and federal efforts to change or create disclosure rules to force the public disclosure of donors to nonprofit organizations, with particular focus on 501(c)(4) social welfare organizations (with some attention also paid to 501(c)(3) charitable organizations). And, as the states and Congress consider, and sometimes enact, changes to disclosure laws, the jurisprudence around disclosure is evolving. This is seen most notably in the major U.S. Supreme Court decision Americans for Prosperity Foundation v. Bonta (AFPF), which struck down a California rule mandating that charities reveal many of their donors to the government. The AFPF decision has spurred subsequent litigation to address questions left unanswered by the decision.

The rhetoric around forced donor disclosure is heated. For instance, Senator Sheldon Whitehouse, in advocating for broadened disclosure requirements, refers to the “toxic flood of dark money” that has allowed the wealthy and interest groups to “rig the system secretly in their favor.” But, given the legislative and legal activity surrounding disclosure, it is important to move beyond such rhetoric and assess donor disclosure from a social scientific perspective, using the lens of cost-benefit analysis. This paper will show the benefits of forced donor disclosure fall far short of what its proponents claim.

The next section lays out the legal rationale for disclosure, with a focus on campaign finance disclosure (which is closely related to nonprofit disclosure). From there, it shows empirical research raises questions about the legal rationale for disclosure, focusing primarily on the purported informational benefits of disclosure. Then, it addresses the more limited empirical research on disclosure costs. Finally, it covers how one can understand disclosure laws through the lens of an economic theory known as public choice.

What Social Science Tells Us About Forced Donor Disclosure

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In the primer, When Private Foundations Give Through DAFs, the Roundtable’s Jack Salmon explores the valuable ways private foundation use DAFs.  

As the primer explains, private foundations give through DAFs for many reasons including:  

• To streamline giving by pooling resources with other donors, ensuring charities receive maximum impact without excessive administrative burdens.  
• To allow small private foundations to leverage the economies of scale and investment expertise inherent in DAF structures.  
• To streamline administrative and legal processes for scholarship funds.  
• To mitigate bookkeeping difficulties for challenge and multi-year capital grants.  
• To foster harmony when family foundations have varied philanthropic interests.  
• To provide a strategic avenue for having a dispersed geographical impact.  
• To donate internationally. Smaller foundations may not have the resources to comply with paperwork and due diligence requirements. Giving through a DAF allows them to outsource these functions.  
• To buy time for giving decisions when a founder passes or when there is an administrative change in a foundation.  
• To issue a one-time, off-mission grant, such as COVID relief or wildfire disaster recovery, without opening the door for further solicitations.  
• To train future generations in grantmaking.  
• To protect donor information when granting to a controversial cause.  

When Private Foundations Give Through DAFs: Exploring the How and Why of This Practice

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Preserving the original intention of donors is crucial for establishing and upholding trust between donors and charitable organizations. This trust is essential for fostering the generous contributions that sustain a vibrant philanthropic sector and the private charities that help those in need.  

Unfortunately, the rising instances of ideological and mission drift in numerous charities, including educational institutions like colleges and universities, often leads to a disregard or violation of donors’ intentions.  

In light of these growing issues, Philanthropy Roundtable has partnered with the law firm Boyden Gray PLLC to produce this first of its kind report on donor intent conditions in all 50 states. It provides a comprehensive state-by-state overview of the current landscape of charitable donor intent protections, identifying key challenges and opportunities to ensure donors remain confident in their robust giving to diverse causes and communities. 

Insufficient legal safeguards in numerous states exacerbate the threats to giving, where the Uniform Prudent Management of Institutional Funds Act (UPMIFA) serves as a foundational standard but falls below the mark in guaranteeing the preservation of donor intent. To make matters worse, many states have amended the UPMIFA to explicitly permit the consideration of factors beyond donor intent and even beyond the direct charitable purpose in the management of charitable funds. This includes the authorization to take into account environmental or social concerns.  

UPMIFA permits charities to alter the use of donations without requiring court approval. This flexibility is granted when charities deem the original purpose of the donation to be unattainable, wasteful or impractical to maintain. However, charities can only make these changes if the total value of the donated fund is less than $25,000 and more than 20 years have passed since the donation was made.   

Unfortunately, many states have broadened UPMIFAs authorization to modify gift restrictions for larger endowment funds. Many states have also decreased or eliminated the 20-year waiting period following the establishment of the fund.  

Our new report compares each state’s law to the standard UPMIFA and explores how relevant court decisions apply these provisions to modify donor restrictions on gifts with real-life cases. 

Another important issue the report covers is the condition of donor standing in each of the 50 states. “Standing” refers to who the state will allow to sue in court to enforce some aspect of state law. Most states leave the enforcement of donor intent in the hands of the state’s attorney general.  

As our report reveals, only two states — Kansas and Iowa — have adopted donor standing statutes that empower donors to directly protect their intent in legal proceedings. Philanthropy Roundtable testified in favor of the “Donor Intent Protection Act” in Kansas that was signed into law in 2023. 

Overall, the findings of this report highlight the ongoing need for more comprehensive legal safeguards and consistency across states to balance donor intent protections with evolving charitable landscapes. 

Protecting Donor Intent: A 50-State Analysis of Legal Protections

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Through private foundations, Americans have established an unrivaled reputation for their exceptional commitment to philanthropy, generously providing private funds to serve the common good. Philanthropy Roundtable’s vision is to foster and sustain a dynamic American philanthropic movement, where private foundations continue to play a pivotal role in fortifying our free society. Charitable organizations are instrumental in strengthening our communities and are fueled by private foundations that provide a consistent and reliable source of funding for charities and their initiatives.

Foundations reflect a vibrant diversity of charitable goals and their long-term financial commitments allow for strategic planning and the implementation of impactful, creative projects. While many charitable initiatives require strategic long-term giving, there are also major charitable projects that require large one-time investments.

For example, the initial investment of endowing a chair at a university, building a new museum or medical research facility, creating a scholarship endowment fund, or establishing a new school all require a large one-time investment.

According to the latest available data, there are around 125,000 domestic grantmaking foundations registered in the United States. In 2022, private foundations provided over $105 billion in charitable giving, up from almost $103 billion in 2021. Even after adjusting for inflation, private foundation giving has roughly doubled over the past 15 years and quadrupled over the past 25 years.

As our charitable sector seeks to address society’s most pressing problems and to provide aid to those in need, it is confronting mounting policy challenges. To help support this work, lawmakers must refrain from imposing additional barriers and restrictions on the charitable endeavors of private foundations dedicated to fulfilling their organizational missions and serving their communities.

This report reviews the historical background that led to the establishment of the 5 percent payout requirement for private foundations, analyzing the reasons behind the selection of this specific figure. Additionally, it provides an overview of contemporary criticisms surrounding the distribution requirement, with some asserting the rate is inadequate or should exclude specific charitable expenses.

Subsequently, the paper offers an extensive examination of comprehensive data and literature concerning foundation payout patterns. This analysis encompasses payout rates, investment returns of foundations, distributions by family foundations, and the legal, albeit rare, transfer of funds from foundations to donor-advised funds.

Private Foundations and the 5 Percent Payout Rule

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Donor-advised funds (DAFs) have emerged as a popular philanthropic tool, providing donors with flexibility, ease of use, and accessibility in their charitable giving. Prior research on DAF trends tend to find average payout rates above 20 percent, while median payout rates are typically around 13 percent (Heist and Vance-McMullen, 2019). For example, the 2022 National Philanthropic Trust annual report on DAFs found the average DAF payout rate to be 27.3 percent in 2021, with a total of almost $46 billion being granted to charities that year.

In California, the use of DAFs has garnered attention due to limited available data on the subject. However, a new analysis of data from twenty-two of the largest community foundations in the state sheds light on the widespread adoption and diverse practices of DAF usage. This report analyzes the findings of this analysis to provide valuable insights into the landscape of community foundation use of DAFs in California.

Using the latest available data (fiscal years 2021 and 2022) on 990 filings, we examined twenty-two large community foundations in California, which collectively represent over 90 percent of all community foundation assets in the state. Among these foundations, the number of DAF accounts exceeded 6,600, with $16.7 billion of assets. This substantial figure indicates DAFs have become a popular and significant mechanism for charitable giving and fund management among private foundations in California.

Community Foundation Use of DAFS in California: Payouts, Flow Rates, and Inactivity Policies

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Members of Congress are increasingly concerned about foreign donations to 501(c)(3) and 501(c)(4) organizations potentially being used for US political activities. Yet, as we delve into the details and examine available data, a complex and nuanced narrative emerges. The rise in scrutiny appears to be fueled by a small number of bad actors that should be investigated and prosecuted, rather than a systemic abuse of the laws and regulations underlying the nonprofit sector—particularly tax-exempt charitable organizations.

Even within the context of IRS examinations, instances of noncompliance—particularly nonprofits inappropriately engaging in political activities—seem relatively rare. Moreover, a closer look at the political engagement of 501(c)(4) organizations reveals that the narrative is not one of widespread advocacy, but rather a more nuanced pattern of involvement.

America is more than a government and group of individuals. It is home to an intricate landscape of nonprofit organizations, created and supported by like-minded citizens who are passionate about diverse causes and communities. If lawmakers concentrate solely on the political activities of these charitable organizations, they risk distorting their broader role and contributions to the well-being and improvement of our society.

Imposing rigid regulations or sweeping donor disclosure mandates without due consideration to the constitutional right to privacy in association could inadvertently undermine the support and services these nonprofits offer Americans across the country, ranging from assisting disabled veterans and funding volunteer fire departments to providing educational resources to disadvantaged kids and fostering community service groups and neighborhood associations.

This policy brief begins to explore the complexities underlying the broader discourse on nonprofit activities, donor privacy, and the delicate balance between political transparency and American’s constitutional right to private, voluntary association.

Donor Disclosure Means Less for Charities and Those They Serve

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• Charitable nonprofits are divided into two main categories by the Internal Revenue Service (IRS): public charities, which receive support from a range of sources, and private foundations, which are primarily funded by one, or few, sources.
• Public charities and private foundations both play an important role in the charitable sector, by supporting civil society and serving communities in need. Combined, individual donations to charities and grants from private foundations make up almost 90 percent of total charitable giving.
• With a different set of rules for each, the IRS determines whether an entity is a public charity or private foundation by employing the public support test. To qualify as a public charity, a nonprofit organization must receive at least one third of its contributions from the general public, government sources, or nonprofit funding intermediaries.
• Organizations determined by the public support test to be private foundations have lower tax deductible giving limits, more onerous regulatory restraints, and more restrictions on funds.
• Proposals to reform the public support test come with important consequences for the charitable sector, including overcomplicating determination requirements and shutting out certain charitable vehicles from being counted toward the public support test.

Decoding the Public Support Test

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In recent years we have seen growing political momentum for wealth taxes, the most common of which is a proposal to tax unrealized capital gains. A tax of this nature could have significant negative impact on philanthropy and charitable organizations. Taxing unrealized gains means investors would have to pay taxes on the gains they have not yet received, reducing the amount of money available for charitable giving.

This would lead to a decrease in donations to charitable organizations, hindering their ability to carry out their missions and support those in need. Philanthropists may be discouraged from making charitable donations if they are subject to taxes on unrealized gains, which could have a long-term effect on charitable giving. What’s more, if such taxes are deemed constitutional, this could open the door to additional federal taxes on property, wealth, and possibly even the assets of charitable foundations.

Before the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, shareholders were never taxed on income a corporation reinvested into its business. The TCJA included a Mandatory Repatriation Tax (MRT) which imposes a tax on all post-1986 accumulated foreign earnings, even if they haven’t been distributed. By taxing unrealized gains, the MRT violates the equal apportionment clauses of the Constitution and possibly the due process clause of the 14th Amendment. Over a century of case law has found that a tax on unrealized gains is by no measure or definition a tax on “income.”

Taxing Unrealized Gains Is Unconstitutional: Moore v. United States

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