The One Big Beautiful Bill Act (OBBBA), passed earlier this summer, addressed the looming expiration of the 2017 Tax Cuts and Jobs Act (TCJA) by making permanent most of the tax changes from the TCJA. Some of the changes made “permanent” under the OBBBA include a larger estate and gift tax exemption and lower ordinary income tax rates.
Permanence for the expiring TCJA provisions was one of the strong points of the OBBBA, avoiding a large tax increase for many and providing added certainty for individuals and businesses regarding the long-term structure of the tax code. However, the OBBBA also included several new provisions, including a few that will affect the tax benefits of charitable donations moving forward.
35% “Cap” on Benefit of Itemized Deductions and Charitable Deduction “Floor”
The charitable contribution deduction will be limited in new ways beginning in 2026, affecting individuals, corporations and likely trusts and estates.
First, itemized deductions for charitable contributions will be allowed only to the extent the total charitable contributions in a year exceed 0.5% of an individual taxpayer’s adjusted gross income and 1% of taxable income for corporations. This means after 2025, taxpayers only receive a deduction of charitable contributions that are in excess of these “floors.” In some cases, this will entirely eliminate taxpayers’ ability to take a charitable deduction for contributions. If a taxpayer has charitable carryforwards from that year [because the taxpayer donated more than allowed to be taken in a given year due to adjusted gross income (AGI) limitations], then the “below the floor” amounts will increase the carryforwards. If there are no current-year carryforwards, the “below the floor” amounts are permanently lost as deductions.
By way of example, if the individual taxpayer’s charitable contribution floor is $25,000 and the taxpayer makes contributions of $100,000, under the new law, $25,000 of deductions are disallowed and only $75,000 is permitted as a deduction (not taking into account the AGI limitations). If the taxpayer has current year charitable carryforwards (because the amount of the donation exceeds the AGI limitations), the $25,000 will be added to the carryforwards. However, if the taxpayer has no carryforwards for that year, the $25,000 donation is lost as a deduction forever.
Second, for taxpayers in the highest tax bracket, a new provision will cause charitable donations taken as itemized deductions to receive a reduced benefit. Prior to the TCJA, individual taxpayers were subject to a limitation on itemized deductions, which the TCJA eliminated. The OBBBA permanently repealed the prior limitation, instead applying a new reduction to itemized deductions for individual (and probably trust and estate) taxpayers.
The formula is a reduction by 2/37 of the lesser of (1) the amount of the itemized deductions or (2) the taxable income of the taxpayer that exceeds the dollar amount at which the 37% tax bracket begins. As a result, taxpayers in the highest tax bracket lose the actual tax benefit of itemized deductions by 2% (i.e., they now get a benefit of 35 cents on the dollar versus 37 cents on the dollar). This limitation only applies to individuals with income greater than the highest marginal tax bracket who itemize and likely also applies to trusts and estates (because no exemption was included under the new provisions).
As a result, we recommend accelerating charitable giving in 2025 before the new provisions take effect in 2026 to receive the full benefit of charitable giving from a tax deduction standpoint. Going forward, smaller charitable donations may no longer help reduce taxes, so charitable giving should be bunched within a year. Keep an eye on being more creative as to types of assets to donate, including appreciated stock or real estate, to increase the value of the charitable gift.
In addition, taxpayers over the age of 70.5 who own IRAs could utilize qualified charitable distributions (QCD) of over $100,000 per year to directly benefit charities, which counts toward required minimum distributions and is not considered taxable income (which lowers overall AGI).
Finally, going forward, more planning will be focused on helping taxpayers avoid the highest marginal federal income tax bracket. Trustees may be more proactive in distributing income to beneficiaries in order to shift income from the trust to the beneficiaries and stay below the highest marginal rates.
Universal Charitable Deduction for Non-Itemizers
A new provision allows a charitable deduction of up to $1,000 for single taxpayers or $2,000 for married taxpayers for cash gifts to a public charity (excluding a donor-advised fund) even if the taxpayer elects the standard deduction. This is a major change from previous tax law, which only allowed charitable contributions to be taken as deductions in the case of itemizing and may result in many more taxpayers filing using the standard deduction, rather than itemizing.
Permanency Means Predictability
The OBBBA ushered in “permanent” lower income tax rates (37% compared to 39.6%), higher standard deductions and a 60% AGI limit on gifts of cash to public charities (including donor advised funds). The legislation left unchanged the 30% AGI limit on gifts of cash to private foundation and, for gifts of appreciated assets, a 30% AGI limit for gifts to public charities and a 20% AGI limit for gifts to private foundations.
Previously scheduled to sunset at the end of 2025, the higher exemption for gift, estate and generation skipping transfer tax purposes (now $15 million per person beginning in 2026, adjusted annually for inflation) is here to stay. All of this permanency means more predictability for planning purposes. The higher exemption also means fewer families will be affected by transfer taxes and so for them, the focus will be on income tax planning.
The major benefit of permanency to taxpayers is that the pressure has been taken off to make large gifts prior to year end or to completely change charitable giving strategies in the future. However, although the year-end rush won’t be necessary, high-net-worth individuals and families should continue to work closely with their advisors to understand how certain provisions under the OBBBA may affect them and explore opportunities to transfer wealth on a tax-efficient basis.
While the changes introduced by the OBBBA likely will not change the amount of charitable contributions made by taxpayers who are already charitably inclined, it will likely change the timing of giving. Although there is now consistency and predictability, there is also new complexity, and previous charitable giving approaches may not offer the same tax benefits. These new provisions will have differing impact depending upon the circumstances of the donating taxpayer, and new strategies will be developed over time to accomplish tax minimization goals.
