As Republicans debate the latest tax package ahead of the Senate’s July 4 deadline, one provision not causing infighting or breaking alliances could reshape charitable giving.
A little-noticed section of the bill, already passed by the House of Representatives, would increase taxes on private foundations. While foundations with fewer than $50 million in assets would keep the current 1.39% tax, larger ones would face steep increases: 2.78% for those with between $50 million and $250 million in assets, 5% for those with between $250 million and $5 billion, and a 10% rate on the largest foundations.
That shift could affect thousands of organizations. According to FoundationMark, which tracks $1.6 trillion across more than 50,000 foundation portfolios, 2,695 foundations would see tax hikes —672 facing the 5% rate and 25 taxed at the full 10%.
The congressional Joint Committee on Taxation estimates that the tax would generate $15.88 billion in federal revenue over 10 years.
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Effect on Foundations
But experts warn the proposed tax increases may backfire, raising far less revenue than the JCT projects: Many foundations, they say, would likely restructure their finances and investments or shift their giving strategies to avoid higher rates.
“Foundations might shrink,” says John Seitz, founder and CEO of FoundationMark. “That’s the worst thing that could happen because of the tax.”
An internal analysis by TIFF Investment Management, which advises nonprofits, found that higher tax rates could eat into returns. The current 1.39% tax typically trims five to 10 basis points from net performance. At 2.78%, that impact doubles to 10 to 20 basis points. At the top 10% rate, it jumps to as much as 65 basis points—meaning a 10% return would drop to 9.35% after tax.
Anne Duggan, TIFF’s managing director, notes the foundation tax proposal differs from the university endowment tax plan because it touches every private foundation—not just a handful. While most would face relatively modest increases, Duggan says the few foundations with billions in assets could make investment changes or look into using donor-advised funds to offset the tax.
“Despite the 10% headline number sticker shock, the tax drag is not that significant, especially for the 5% and below tax tiers,” she says.
Possible Work-Arounds
While the tax may seem modest for most private foundations, it could still alter how they manage their money. Some may chase higher-yield investments or hire additional financial managers to minimize exposure. But for the wealthiest foundations—those facing the steepest tax rates—the simplest move could be to shift assets into donor-advised funds or other tax-advantaged vehicles.
“If Warren Buffett didn’t want to give his money to the foundation, he could just give it straight to the operating charity,” Seitz said.
Pursuing higher yields will not be a catch-all solution. After all, foundations have about 65% of their assets in stocks and bonds, with only 18% invested in alternative investments, according to FoundationMark.
According to Seitz, many foundations, including several of the largest, have concentrated positions in individual stocks, often of the company of the foundation’s founder.
Lilly Endowment Inc., a private foundation founded by the Lilly family in 1937, had 93.5% of its concentrated holdings in Eli Lilly and Co. common stock in fiscal 2023, according to an analysis by FoundationMark.
The most likely shift, especially from larger private foundations, could be to donor-advised funds.
“If this bill passes and you’re starting a foundation, why wouldn’t you just start a DAF instead?” Seitz says.
Donor-Advised Funds
Every private foundation, large or small, must file with the IRS Form 990PF, which reports, among other things, how much charitable distribution the organization handed out. Private foundations are required to give away at least 5% of their assets each year, so they are consistent donors.
DAFs, notably excluded from the tax bill, are private accounts that manage and distribute charitable donations on behalf of an organization, family or person. They can aggregate contributions from multiple donors but are less regulated than private foundations.
DAFs do not have the payout requirements that private foundations do, and donors do not need to report gifts to individual organizations on their taxes.
Lawson Bader, the president and CEO of DonorsTrust—a donor-advised fund that primarily supports conservative and libertarian causes—says most foundations are unlikely to make major changes unless they face the highest tax rates. However, he notes the legislation could discourage the formation of new private foundations altogether, pushing donors to choose donor-advised funds instead.
“The behavior is probably only going to affect a relatively small number of foundations, but by the same token, those same foundations give a lot of money away every year,” he says. “But we may also see fewer foundations being started because of this bill, because it’s now prohibitively more expensive.”
According to the Baker Institute for Public Policy at Rice University, DAFs grew to nearly 2 million in 2022 from about 219,000 in 2013. In that period, DAFs’ total assets tripled to $229 billion from $57 billion, and contributions into DAFs grew to $86 billion from $17 billion, a staggering 400% increase.
DAFs are not required to disclose the identity of their donors, and 72% of donors who gave anonymously indicated that they did so to avoid public recognition, according to the 2025 National Survey of DAF Donors.
“All Congress is doing is creating or removing what they see as an incentive,” Bader said. “The problem is: They’re not necessarily changing behavior. There’s more of a political hinge to this than there is a realistic economic forum.”
Tags: capital gains tax, private foundation
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