To Give or Not to Give

The OBBBA introduced three new tax provisions that could significantly influence your charitable giving strategies going forward.  Two of these were addressed in our overall tax reform newsletter, but will be recapped here for ease of reference, and the third is complex enough to warrant this additional newsletter.

 

 

Below the Line Deductions (Effective January 1, 2026)

Previously almost all below-the-line deductions were only available if you were itemizing deductions on Schedule A.  In other words, if you previously took a standard deduction, you got no tax benefit for donating to a charitable organization.  For taxpayers taking a standard deduction, the new law creates a permanent deduction of $1000 (single) or $2000 (joint) for charitable donations.  It is worth noting that contributions must be in cash and contributions to a donor-advised fund do not qualify for these purposes.

 

Implications

Since the TCJA increased the standard deduction, only about 10% of households have itemized deductions, which made them ineligible for charitable giving tax deductions. With the introduction of this provision, all households are now eligible to receive a tax deduction for qualified charitable contributions.

 

 

Overall Itemized Deduction Limitation (Effective January 1, 2026)

The new limit cuts the tax benefit from itemized deductions by 2%, effectively limiting the benefit from itemized deductions to a maximum of 35%. In other words, if you are in the 37% tax bracket, your $1000 donation will only yield a $350 tax benefit as opposed to a $370 benefit (as it would if made in 2025).

 

Implications

Donors in the 37% tax bracket who are considering a significant gift, may want to accelerate that gift into 2025 to maximize the deduction before the new law goes into effect in 2026.

 

 

New Floor on Deduction for Itemizers (Effective January 1, 2026)

Donations have long been subject to AGI based limitations depending on the type of donated property and the type of organization to which you are donating.  For instance, cash donations to public charities have always been deductible up to 60% of AGI, while noncash donations to non-public charities have been limited to 20% of AGI.  If a contribution exceeded these limits, the excess contribution would not be currently deductible, but rather carried forward and deducted in a future year.  The new law, for the first time ever, also sets a floor on the deductibility of charitable donations.  This means, beginning in 2026, itemizers who make otherwise deductible charitable contributions will only be able to claim a tax deduction to the extent that their contributions exceed 0.5% of their AGI.  The new law sets an ordering rule specifying which types of contributions are reduced first by the 0.5% AGI floor.  The 0.5% reduction cannot be carried forward to future years unless the AGI limit is also exceeded and deferred to a future year.  Yes, that is super complex and best explained with an example.

 

Example

Let’s assume there is a taxpayer with $200K of AGI.  After receiving a substantial inheritance, the taxpayer decides to make several charitable contributions.  That taxpayer contributes $50K in cash to her local YMCA and $50K in appreciated securities to a private (non-public) foundation.

1. Determine New Floor – The taxpayer’s $200K AGI means that their deductible contributions will be subject to a floor of $1000 ($200K X 0.5%). In other words, they do not get a deduction for donations unless they contribute more than $1000.
2. Apply Ordering Rules – Based on the ordering rules, the $1000 reduction will first be subtracted from the appreciated securities contributed to the private foundation. Accordingly, the net deductible amount will be $49K ($50K – $1000 reduction).
3. Apply AGI Limitation – However, the old AGI limits continue to apply with noncash donations being subject to the 20% of AGI limitation, meaning that only $40K ($200K X 20%) of this net donation is deductible in the current year with the remaining $9000 being carried over to future years.
4. Continue Ordering Rules and AGI Limitation Analysis by Bucket – The $1000 reduction was fully utilized against the appreciated securities donation and therefore does not reduce the cash donation. Further, the cash donation is subject to the 60% AGI limitation.  In this case, that limitation is $120K ($200K X 60%).  Luckily that does not limit the $50K cash donation, as it is below that limit.
5. Determine Total Donation Deduction – The total charitable donation deduction for this year is $90K ($40K appreciated securities plus $50K cash).
6. Determine Carryovers to Future Years – The $9000 of appreciated securities contributed to the private foundation that exceeded the 20% AGI limit is carried over to next year. Additionally, because the contribution of appreciated securities was reduced by the $1,000 AGI floor, that $1,000 is added to the amount that can be carried over, adding up to $10K in carryover contributions.  Notably, the 0.5% reduction is carried forward to the following year only because the contribution exceeded the AGI limit and is deferred to a future year.

 

Implications

High-income individuals who itemize deductions should carefully consider the timing and amounts of their giving, and the strategies to maximize their deduction. Philanthropic taxpayers may want to accelerate charitable contributions into 2025 before the new limit takes effect in 2026. Consider frontloading contributions to a private foundation or donor advised fund in 2025.  On a go-forward basis, a bunching strategy or an approach of making larger gifts with less frequency can be more effective under the new law.  Qualified charitable contributions (QCDs) will continue to be a key planning opportunity for folks over age 70 ½ whether itemizing or taking a standard deduction!