Could one set up a personal private foundation, make contributions which are tax deductable, invest and only get the 2% tax, and have the 5% grant payout to yourself?
It seems to be what most of the USA rich are doing.
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No. The foundations do not pay back to the folks who set them up. They pay to various charities. It's strictly a way of simplifying the bookkeeping.– keshlamCommented Nov 6, 2016 at 4:45
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From what I've read it complicates the book keeping.– Gabriel Connor NelsonCommented Nov 6, 2016 at 4:46
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Gabriel, your "political" point that: some or many trusts, actually just benefit the founders - is an interesting political point. Indeed, you may be correct. Consider some famous tycoon, X, who has a famous charity Y. In fact, if you ask me, X gets incredible benefit from Y - publicity, travel and so on. Maybe such "charities" should simply be scrapped. But note that such a broad political question really is not relevant to this site. The very simple answer to your question ("can you or I get away with it") is "No".– FattieCommented Nov 6, 2016 at 12:00
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To establish a private foundation requires the following :
- Establish its purpose and its guidelines for making grants.
- Decide whether to structure it as a charitable trust or a non-profit organization.
- A private foundation must benefit the public in order for it to maintain its tax exempt status.
- Thorough records, tax returns and skilled employees must be part of the foundation.
- Must obtain an employer identification number and file organizing documents with the IRS.
- Must file necessary paperwork to obtain in-state tax exempt status.
- Must avoid individual organizations from accruing too many benefits.
- Must not allow insiders to accrue too many assets or too much income.
- May not get involved in political campaigns.
- Must limit their involvement with disqualified persons such as big contributors.
So, it looks like you may be engaged in wishful thinking.
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I'll agree to that. But it sounds a lot like a trust with tax breaks. Commented Nov 6, 2016 at 4:50
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It could be a charitable trust. You can't take the money back out for other purposes.– keshlamCommented Nov 6, 2016 at 7:24
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Gabriel, it's worth noting that some "smaller players" do basically get away with the scheme you are proposing. Everyone knows of a - example - local car dealership mogul, who has started some sort of damned charity, helping local orphans, cleaning up a river, or whatever... In the town, "everyone knows" the "real" reason is just to publicize the person's name. (But then, it's true that the orphans/river get some benefit.) So sure, you've discovered and drawn attention to this scam - you're right. Can you or I get "in on it"? Simple answer, no.– FattieCommented Nov 6, 2016 at 12:02
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Also consider this that, quite simply, rich people often just very make a large charitable donation, write a check, for literally no other reason ("in their heart of hearts") than the name publicity. And that's a handy untaxed amount. It's basically the same mechanism.– FattieCommented Nov 6, 2016 at 12:04
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One extremely important thing to keep in mind is that if you ask people to donate to a charity or foundation instead of paying you, that is still taxable income for you. From the IRS' point of view, if they did what you wanted with the money because of something you did for them, they paid you and it's your income. Commented Nov 8, 2016 at 9:00