In 2025, family foundations (typically structured as private foundations) operate under specific IRS regulations focused on self-dealing prohibitions, a mandatory 5% annual distribution of assets, and an excise tax on net investment income. Recent tax legislation in 2025 has also made changes to individual charitable deduction limits.
Key IRS Rules for Family Foundations (Private Foundations) in 2025
Operational Requirements
- Legal Structure and Status: A family foundation is generally a 501(c)(3) organization. The IRS presumes any 501(c)(3) is a private foundation unless it proves it is a public charity.
- Annual Distributions: A private foundation must distribute approximately 5% of the fair market value of its net investment assets each year for charitable purposes (qualifying distributions).
- Self-Dealing Prohibition: Foundations are strictly prohibited from engaging in "self-dealing" transactions with "disqualified persons" (substantial contributors, foundation managers, and their family members). Violations can result in steep penalties.
- Excise Tax: Private foundations pay a 1.39% excise tax on their net investment income. A higher tiered tax rate may apply to larger foundations based on asset size, per recent 2025 legislation.
- Required Filings: Foundations must file an annual information return with the IRS, typically Form 990-PF.
- Governing Instruments: The foundation's governing document must contain specific provisions in addition to general 501(c)(3) requirements, which in many cases can be satisfied by reference to state law.
2025 Tax Law Changes for Donors
Recent 2025 tax legislation has introduced new rules affecting how donors interact with foundations:
- Deduction Limits (Itemizers): For taxpayers who itemize deductions, a new 0.5% AGI (Adjusted Gross Income) floor has been introduced, meaning contributions are deductible only to the extent they exceed 0.5% of AGI.
- Deduction Cap for High Earners: For individuals in the top tax bracket, the tax benefit of itemized charitable deductions is now capped at 35%.
- Deduction for Non-Itemizers (Effective 2026): Starting in the 2026 tax year, taxpayers who take the standard deduction will be able to claim a separate "above-the-line" deduction for cash contributions, up to $1,000 for single filers and $2,000 for married couples filing jointly.
- Standard Deduction Increase: The standard deduction for 2025 increased to $15,750 for single filers and $31,500 for married couples filing jointly.
- Gift and Estate Tax Exemption: The high gift and estate tax exemption amounts have been made permanent under the new legislation, with the 2025 lifetime exemption at $13.99 million per individual (and rising in 2026).
For detailed guidance, it is recommended to consult the official IRS website on private foundations or refer to IRS Publications, such as Publication 557, Tax-Exempt Status for Your Organization.
