The philanthropy community is expressing concern over the proposed tax changes in the House’s One Big Beautiful Bill (OBBB), which could increase taxes on the net investment income of private foundations by up to $1.6 billion annually, or $15.8 billion over a decade, according to Congress’s Joint Committee on Taxation (JCT).
Organizations like the Philanthropy Roundtable describe this as a “600% tax increase on private charity,” while the Council on Foundations argues it “threatens to reduce funding for communities in need.”
However, these claims are seen as exaggerated. The taxation of investment income from tax-exempt assets is not a direct tax on those assets or charitable activities. This approach aligns with how investments in 401(k) accounts are taxed; contributions are tax-deductible, but withdrawals during retirement are taxed at ordinary income rates.
Philanthropists receive federal tax deductions for contributing to their foundations, and taxing the investment income generated by these funds ensures parity. Exempting such income would result in double tax benefits for philanthropists.
The tiered tax structure proposed in OBBB may lead to it being an “optional” tax since assets could be moved into donor-advised funds (DAFs), which are exempt from this tax. A more effective solution might involve applying a single rate to both foundations and DAFs.
Private foundations have been subject to taxes on their net investment income since 1969. At that time, Congress believed that “private foundations should share some of the burden of paying the cost of government.” The rate has varied over time, currently standing at 1.39% since 2019.
Despite this taxation history, private foundations have grown significantly, with IRS data showing they held $1.4 trillion in total assets in 2021—double what they held a decade earlier.
IRS microdata for 2023 reveals substantial wealth within large foundations; about 145 private foundations possess more than $1 billion each in assets, totaling over $604 billion collectively and reporting more than $34 billion in investment income.
The OBBB proposes replacing the current flat rate with a tiered system based on asset value. This change might encourage behavioral shifts due to cliffs between fixed bands and because DAFs remain untaxed under this proposal.
Philanthropist John Arnold warned via social media that only taxing private foundations might drive funders towards DAFs: “By only taxing private foundations and not DAFs…everyone will convert foundations to DAFs.” He advocates for equal treatment between DAFs and foundations under any new tax law.
JCT estimates that this new tax could generate $15.8 billion between 2025 and 2034 but acknowledges potential avoidance behaviors like shifting assets into DAFs. A unified flat rate for both entities might mitigate such avoidance strategies and create fairness between retirees’ rates and those paid by charitable entities.
Currently, the Senate version of OBBB does not propose increasing taxes on private foundation net investment incomes.
This article first appeared in the Giving Review on June 16, 2025.