Question

how foundations can be used to evade tax. give examples.

Answer 1

Foundations can be used to reduce the tax burden or the tax liabilities. Please see the explanations and examples below:

Income Tax Savings

• Contribution to a private foundation is eligible for an income tax deduction of up to 30 percent of adjusted gross income (AGI) and up to 20% of AGI for appreciated securities, with a five-year carry forward.
• Further the tax deduction is up front while charitable deductions can be made throughout the year

Capital Gains Tax Savings

• By donating highly appreciated assets to the private foundation, one can avoid paying capital gains taxes
• Example: Donate appreciated long-term stock to the foundation. This will entitle you to receive an income tax deduction for its full, fair-market value. Once the stock is sold in future, the foundation will be required to pay only the nominal tax on the net capital gains.

Estate Tax Savings

• Assets contributed to a private foundation are excluded from the list of estate possessed by the contributor.
• The contributor therefore is not subjected to federal or state estate taxes.

Tax-Advantaged Growth of Assets

• Assets contributed to the private foundation grows in a tax-advantaged environment
• It's very unlikely that over the years, the value of the foundation will surpass the level of initial funding
• Hence, the contributor can continue to enjoy zero or marginal tax liability