Pressure builds to increase giving requirements and expand charitable deductions

Pressure builds to increase giving requirements and expand charitable deductions

More than $1.1 trillion currently sits in private foundations and donor-advised funds (DAFs) in the U.S. These two charitable intermediary tools have grown tremendously in recent years, fueled by tax-deductible contributions for the wealthiest of Americans. By 2019, 12.7% of all individual giving went to DAFs and an additional 15.1% went to private foundations — an over 500% growth in individual giving to these warehouse/intermediaries over the past 30 years.

While private foundations and donor-advised funds amass huge sums of money, demands on nonprofits to provide essential social services have skyrocketed. Despite the growing need and increased contributions to foundations and DAFs, average giving to charity in the U.S. has remained constant for 40 years at roughly 2% of disposable income.

Donors who make contributions to private foundations or DAFs receive an immediate tax deduction. A well-planned donation from the wealthiest Americans can save those donors (in tax deductions) up to 74% of the value of the donation. Because of 2017 changes in tax laws, this privilege is only available to the wealthiest, leaving the remaining taxpayers to pick up the tab.

Consider these facts:

  • Although private foundations are required annually to distribute 5% of their assets, there is no requirement that those payouts go to charities. Under current law, foundations can satisfy the 5% rule by paying salaries, administrative and travel expenses (often to family members), by making program-related investments in for-profit companies, and by making contributions to DAFs.
  • There is no DAF payout requirement at all. More than $140 billion sits in tax-advantaged DAFs without any assurance that it will go to charity in any time frame.
  • Although DAF supporters argue that they have high payout rates to charities, these numbers are misleading and inflated. Some DAF accounts donate 100%, while a fourth of DAFs donate less than 5%, and some nothing at all.  Moreover, the numbers include DAF-to-DAF donations — resulting in no benefit to working charities.

At a time when demands on charities are greater than at any time in memory, and local, state and federal governments are straining to meet the needs of a society with growing income inequality, the movement to change the giving rules in the U.S. is growing.

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