Many of you have reached out recently with questions about how pending tax legislation might impact the charitable planning strategies you recommend to your clients. San Diego Foundation (SDF) team keeps a close eye on legislative developments related to philanthropy, and we are always here as a sounding board for you and other attorneys, CPAs and financial advisors.
Our latest update addresses these potential tax law changes and two important, tried-and-true charitable planning strategies.
- Tax law changes are on the horizon, and pending legislation creates many unknowns for advisors and the clients you serve. SDF is happy to provide a high-level overview of what’s on the table and offer insights into how proposed tax reform might impact your clients’ charitable giving strategies.
- Many of your clients likely own their own businesses, and most of those clients are likely supporting charities in the community. That’s why it’s really important to know the benefits of giving closely-held business interests to a fund at SDF, as well as understand how to avoid pitfalls and mistaken assumptions when establishing a private foundation.
- As you work with charitable clients, you may discover that they’ve established a donor-advised fund (DAF) at a national commercial provider. It’s easier than your clients (and you!) might think to transfer this DAF to a community foundation like SDF, which offers the same tax benefits plus the benefits of local connection. Learn how it works, step by step, and how we can help.
As always, we’re honored to be your first call whenever the topic of charitable giving arises. Our goal is to help your clients make a difference, especially during these uncertain times.
Pending Tax Legislation
There’s little doubt that you’ve seen extensive news coverage of the so-called “Big Beautiful Bill” (H.R. 1) that passed the House of Representatives by a 215-214 vote on May 22. On June 16, the Senate Finance Committee released text of the tax provisions of the larger budget reconciliation package.
Below, find an initial summary of provisions impacting individual giving from the Council on Foundations.
Changes to charitable deduction for itemizers.
- Current law: The top income tax bracket is 37%, meaning top earners receive a tax benefit of $0.37 for each dollar deducted from their taxable income. Under the TCJA, individuals who itemize can deduct charitable giving worth up to 60% of their taxable income from their adjusted gross income (AGI). This provision expires at the end of 2025, meaning in future years itemizers will only be able to deduct up to 50% of their taxable income from their AGI.
- What’s in the initial Senate Finance Committee text:
- Section 70111 caps the tax benefit at $0.35 for each dollar of itemized deductions rather than the full $0.37 per dollar.
- Section 70425 would create a 0.5% floor on charitable contributions for itemizers, meaning individuals who itemize would only earn a charitable deduction for giving in excess of 0.5% of their charitable contribution base (i.e., their AGI calculated without taking into account any charitable giving).
- Section 70425 would also make permanent the TCJA’s increased contribution limit of 60% for cash gifts made to qualified charities for taxpayers who elect to itemize.
- What’s in the House-passed version: Section 110011 caps the tax benefit of all itemized deductions at $0.35 rather than the full $0.37 per dollar.
- Estimated cost: JCT estimates the House provision would generate $41.2 billion over ten years; however, note that this estimate includes all itemized deductions, not just the charitable deduction.
- Impact on philanthropy: Any limits to the charitable deduction negatively impact nonprofits, which rely on the generosity of everyday Americans. Making permanent the expanded charitable deduction for itemizers would continue to incentivize charitable giving at a time when nonprofits are in critical need.
Charitable deduction for nonitemizers.
- Current law: Taxpayers who do not elect to itemize are not currently eligible for a charitable deduction.
- What’s in the initial Senate Finance Committee text: Section 70424 would create a permanent deduction for taxpayers who do not itemize, capped at $1,000 ($2,000 for joint filers). This does not include contributions to DAFs.
- What’s in the House-passed version: Section 110112 creates a charitable deduction for nonitemizers set at $150 ($300 for joint filers), not including contributions to donor-advised funds. It would sunset at the end of 2028.
- Estimated cost: JCT estimates the House provision would cost $6.94 billion over 10 years.
- Impact on philanthropy: This provision would recognize a broader swath of Americans for their giving.
Standard deduction.
- Current law: The TCJA increased the standard deduction and pegged it to inflation. This increase is set to expire at the end of 2025. The standard deduction for 2025 is $15,000 ($30,000 for joint filers).
- What’s in the initial Senate Finance Committee text: Section 70102 makes permanent the increased standard deduction from the TCJA and further increases it to $16,000 ($32,000 for joint filers) for 2026, pegged to inflation in future years.
- What’s in the House-passed version: Section 110002 makes permanent the TCJA increase and temporarily further increases the standard deduction by $1,000 ($2,000 for joint filers). The temporary increase would expire at the end of 2028.
- Estimated cost: JCT estimates the House provision would cost $1.3 trillion over 10 years.
- Impact on philanthropy: Increasing the standard deduction means even fewer taxpayers will be eligible for the charitable deduction. This increase makes it even more important for Congress to pass a charitable deduction for nonitemizers.
Charitable contributions to scholarship-granting organizations.
- Current law: Currently, charitable contributions to scholarship-granting organizations are treated like any other contribution to a charitable organization.
- What’s in the initial Senate Finance Committee text: Section 70411 reflects the House-passed version of this provision, but does not have an expiration date.
- What’s in the House-passed version: Section 110109 would create a nonrefundable tax credit that sunsets at the end of 2029:
- Of up to $5,000 or 10% of the taxpayer’s adjusted gross income (whichever is greater)
- For contributions made to organizations granting scholarships to private or religious elementary and secondary schools
- For all taxpayers, including those who do not itemize.
- Estimated cost: JCT estimates the House provision would cost $20.44 billion over 10 years.
- Impact on philanthropy: This would create a charitable credit for one specific type of charitable organization, rather than for all section 501(c)(3) public charities.
Please reach out anytime regarding tax legislation and the impact on your charitable clients.
Our team is happy to discuss options for your clients’ charitable giving to ensure that they’re supporting their favorite causes and critical local needs in the most effective ways possible under any set of tax laws.
Benefits of Donating Business Interests to an SDF Fund
If your client base includes business owners, you probably weren’t surprised by this observation in a recent Wall Street Journal article about the “stealthy wealthy”: “Behind a paycheck, the largest source of income for the 1% highest earners in the U.S. isn’t being a partner at an investment bank or launching a one-in-a-million tech startup. It is owning a medium-size regional business.”
Moreover, the chances are very good that most of your business-owner clients are charitably inclined. Indeed, more than 90% of small business owners have supported charities and community activities in the last year.
This means that you and other tax and estate planning advisors ought to have at least a basic level of knowledge about the benefits and mechanics of giving closely-held business interests to charity. When properly executed, this technique can be highly effective in achieving your client’s financial and philanthropic goals.
Here are three very important components of this strategy:
1. Stop before you use a private foundation.
Some of your business owner clients probably have established a private foundation. But the private foundation is not the ideal recipient of private business interests.
Donating closely-held stock to a fund at San Diego Foundation is generally more tax effective than giving it to a private foundation due to several key differences in how the IRS treats these gifts. When your client donates closely-held stock to a community foundation, your client can typically deduct the full fair market value of the stock, up to 30% of adjusted gross income, and also avoid paying capital gains tax on any appreciation. By contrast, if your client donates the same stock to a private foundation, the deduction is limited to cost basis up to only 20% of AGI, which is a significantly less favorable tax outcome.
2. Mind the timing.
Encourage a business owner client to start planning for a gift of closely-held stock before putting out feelers to potential acquirers and absolutely before any part of a deal is inked. This is crucial because a gift to charity will avoid substantial unrealized capital gains that have accrued in the business over the years only if the gift and the sale are genuinely separate events, avoiding the step transaction doctrine. Careful planning will help ensure that the client’s fund at SDF will receive 100 cents on the dollar for the portion of the stock it owns, and the deduction won’t be thrown out.
3. Respect the rules for valuation.
Counsel your clients about securing a proper valuation for charitable deduction purposes at the time the business interest is contributed to a fund at a community foundation. Valuation has always been a critical factor in any type of tax or estate planning strategy.
Recently, the additional wrinkle presented by the Supreme Court’s decision in Connelly v. United States makes things even more interesting. The Connelly decision impacts the way business interests are valued for estate tax purposes. In Connelly, the Supreme Court held that life insurance proceeds indeed ought to be included in the value of a company without offsetting the redemption obligation. This could translate to higher taxable estates for your business owner clients, creating further incentive to leave a portion of closely-held stock to charity. The decision is also a reminder that careful planning can potentially avoid pitfalls.
Easier Than You Think: Moving a DAF to a Community Foundation
As you advise clients on charitable giving, you’re likely aware of the growing popularity of the donor-advised fund as a flexible, tax-efficient tool for philanthropy. Many families appreciate how DAFs can streamline giving, foster family engagement, and serve as a launchpad for deeper community impact.
Recently, we’ve engaged with many professional advisors – attorneys, accountants, and financial planners – who work with clients utilizing San Diego Foundation services in various ways. These include contributing to important initiatives, supporting a SDF’s operating endowment, making qualified charitable distributions (QCDs) from IRAs, or participating in SDF-hosted events that address critical priorities in San Diego.
Interestingly, we have discovered that some advisors were not aware that their clients had established donor-advised funds through national financial institutions. Although these clients are familiar with SDF, they simply did not know that the Foundation could help them in multiple ways, including establishing a donor-advised fund to support favorite charities.
It’s easier (and more beneficial!) than you might think for your client to move a donor-advised fund to SDF. Here’s what you need to know:
Tax and administrative advantages are the same.
SDF offers donor-advised funds with the same tax and administrative advantages as national providers, including:
- Online access for clients to view fund balances, contributions, and grant history
- Simple grantmaking process to qualified charities
- Consolidated tax reporting, often with a single year-end letter for all contributions and grants
- Comprehensive back-office support for administration, tax receipts, recordkeeping, and compliance with 501(c)(3) requirements
- Favorable tax deductibility for contributions, including gifts of cash, securities, and other assets
Added value at San Diego Foundation.
Unlike many national donor-advised fund sponsors, SDF offers a suite of high-touch, locally-informed services that can enhance your clients’ philanthropic strategies, such as:
- Personalized service from staff experienced in structuring complex gifts (e.g., appreciated stock, real estate, closely-held business interests, estate gifts)
- Local expertise on community needs, nonprofit effectiveness, and high-impact grantmaking
- Opportunities for collaboration with other donors and access to educational forums featuring local and national experts
- Deep engagement in specific issue areas, including educational opportunities and hands-on involvement for clients and their families
- Impact measurement support to help clients track and communicate the outcomes of their giving
- Family and corporate philanthropy services to foster long-term, multi-generational charitable engagement
- Administrative fees that are reinvested in the community, supporting local operations and amplifying our community foundation’s mission
- Direct access to local experts who can research and recommend causes aligned with your clients’ goals
- Staff with deep community roots who maintain close relationships with nonprofit leaders and stay attuned to emerging needs
What next?
The steps to transfer a donor-advised fund are surprisingly simple:
- Work with our team to establish a DAF. Our straightforward, easy-to-complete paperwork makes it seamless and fast. Your client can mirror the terms of the existing donor-advised fund or adjust successor advisors and legacy provisions based on their charitable intentions. Our team will walk through the process with you and your client.
- Work with your client to request a grant from the national donor-advised fund provider. Depending on the provider, this can sometimes be completed all online. Designate SDF (and reference the new donor-advised fund if possible) as the grant recipient.
- Your client may be able to grant the entire balance in one transaction. If not, most of the balance can be transferred to fund the new donor-advised fund, and you can work with your client to transfer the rest later.
- Before closing the donor-advised fund at the national provider, your client should download grant history and contribution information for future reference and tax documentation. Note that transfers between donor-advised funds are tax-neutral; these transactions are not taxable events.
Learn More
For 50 years, we have partnered with an extensive network of wealth advisors, estate planning attorneys, tax planners and other financial advisors to help high-net-worth clients and families achieve financial planning objectives and charitable giving goals while maximizing tax deductions.
If you want to learn how we can help meet your clients’ financial planning and charitable giving goals in 2025, contact me at (858) 245-1508 or jrogers@sdfoundation.org.
