🎁 Strategic Giving: How does the One Big Beautiful Bill Act change the rules for Charitable Giving deductions?
The One Big Beautiful Bill Act (OBBBA) significantly alters the tax landscape for charitable giving, particularly for high-income itemizers and non-itemizers alike, beginning in 2026. Specifically, the Act imposes a new 0.5% Adjusted Gross Income (AGI) floor for individual itemizers. Furthermore, it restricts the deduction for contributions to Donor-Advised Funds (DAFs) for taxpayers who take the standard deduction. Therefore, taxpayers must immediately review their gifting strategy to maximize their tax prep benefits and ensure compliance.
🛑 The New Floor: Strategic Challenges for Itemizers
The introduction of the 0.5% AGI floor is the most critical change for itemizers. Consequently, small, consistent annual gifts may no longer provide a tax benefit.
1. How does the 0.5% AGI Floor work?
The new rule creates a non-deductible threshold. Specifically, you can only deduct contributions that exceed 0.5% of your AGI.
- Example: A taxpayer with a $400,000 AGI faces a $2,000 floor ($400,000 x 0.005). Thus, the first $2,000 of gifts are nondeductible.
- Impact on Giving: Consequently, only donations above the calculated floor reduce taxable income.
- Effective Date: Crucially, this 0.5% AGI floor takes effect starting in the 2026 tax year.
2. Strategic Response: Contribution Bunching
To counter the new floor, donors should utilize a bunching strategy. This maximizes the deduction benefit.
- The Strategy: You consolidate several years’ worth of planned donations into one tax year.
- The Benefit: This ensures the single large contribution easily clears the 0.5% AGI floor.
- DAF Utilization: Furthermore, many high-net-worth individuals make a single, large contribution to a Donor-Advised Fund (DAF) in the “bunching” year. Then, they grant out smaller amounts to charities over the next two to four years.
💰 The Value Erosion: High-Income Limits
The OBBBA also reduces the tax benefit of charitable deductions for the highest earners. Consequently, these changes require immediate action in tax prep.
3. The 35% Deduction Cap
High-income donors in the top tax bracket face a new limit on the value of their deduction.
- Top Bracket Rate: The highest federal income tax bracket is 37%.
- New Cap: However, beginning in 2026, the value of all itemized deductions, including charitable giving, is capped at 35% of the amount deducted.
- Impact: Therefore, a $10,000 gift generates $3,500 in tax savings (35% of $10,000). Previously, it generated $3,700 in savings.
4. Why Accelerate Giving to 2025?
High-net-worth taxpayers should consider accelerating large gifts now. Specifically, this action locks in the maximum benefit.
- Maximize Value: Giving in 2025 avoids both the 0.5% AGI floor and the new 35% deduction cap.
- Strategic Window: Thus, 2025 is the last year to receive the full 37% tax benefit on large gifts.
🤝 Inclusion for Non-Itemizers and DAF Exclusions
The OBBBA provides a small benefit to non-itemizers. However, it places a restriction on the use of DAFs for this group.
5. The New Universal Deduction
Taxpayers taking the standard deduction now receive a small tax benefit for giving.
- Deduction Amount: Non-itemizers can claim an above-the-line deduction of up to $1,000 (single) or $2,000 (joint).
- Eligibility: Crucially, this applies only to cash gifts made directly to public operating charities.
- DAF Exclusion: Furthermore, gifts to Donor-Advised Funds (DAFs) or private foundations do not qualify for this universal deduction.
6. TYS Source Signal: Non-Cash Asset Gifting
Charitable giving is often most tax-efficient when using non-cash assets. Consequently, this remains a best practice.
- Appreciated Stock: Donating appreciated stock or real estate held long-term avoids capital gains tax entirely. In addition, you can deduct the full fair market value (subject to AGI limits).
- TYS Expertise: With over 60 years of specialized construction accounting expertise, TYS helps clients in Rochester, NY, and Walnut Creek, CA, integrate complex asset gifts. We ensure your philanthropic goals align with the new deduction limitations.
Q&A: Charitable Giving Under the OBBBA
| Question | Answer |
| Q1: Does the 0.5% AGI floor apply to contributions carried over from 2025? | No. Contributions carried over from 2025 (before the rule) are not subject to the new 0.5% AGI floor limitation in subsequent years. |
| Q2: Should my small business accelerate corporate giving? | Yes. Corporations now face a 1% taxable income floor starting in 2026. Therefore, bunching gifts into 2025 helps ensure the current year’s giving is fully deductible. |
| Q3: Can I use a Qualified Charitable Distribution (QCD) from my IRA to avoid the 0.5% floor? | Yes. A QCD is excluded from your AGI. Consequently, it is not subject to the 0.5% AGI floor or the itemized deduction limits. |
| Q4: Are contributions to Donor-Advised Funds (DAFs) still fully deductible for itemizers? | Yes. DAF contributions are still fully deductible for itemizers. However, they are subject to the new 0.5% AGI floor and the 35% benefit cap starting in 2026. |
Align your generosity with your new tax strategy. Contact TYS today for specialist tax preparation and Construction Accounting services in Fairport, NY, or Walnut Creek, CA.