We wrote a couple of weeks ago focusing on two of the key changes stemming from the OBBBA (and some of you have given some very creative names to this acronym…though officially known as the One Big Beautiful Bill Act). That piece, accessible here, focused on the expanded SALT deduction and the new “bonus deduction” for seniors. Today we’re going to expand our knowledge of the OBBBA, diving into some less heralded changes to charitable giving deductions. Before you tune out thinking, “I don’t itemize and thus never get a tax benefit for my giving…”, please keep reading – as one of these changes is aimed directly at you (in a good way).
Let’s start with a couple of important facts:
- These changes take effect in 2026 – but they could mean wise planning needs to happen starting in 2025.
- These changes, unlike many parts of the OBBBA, are permanent (to the extend that any tax law is really “permanent”).
Now, let’s turn to the two changes we want to look at today:
- Donors who do not itemize will now be eligible to deduct as much as $2,000 (married filing jointly) or $1,000 (single) while still utilizing the standard deduction.
- Donors who do itemize will see a reduction in their charitable deduction, as gifts up to the first 0.5% of AGI will not be deductible and all itemized deductions will be limited to a max 35% tax rate deduction (not 37%).
The new “Standard Plus” deduction*
*Note, “standard plus” is a name I have given it…you won’t find any such reference to it anywhere in the tax code or even ChatGPT.
We’ll start by exploring item #1 above. This is an exciting new provision for the many of you that are incredibly philanthropic but may have gotten in the habit of overlooking charitable deductions because the standard deduction climbed so high in 2017 (and is climbing further with the OBBBA). This new $2,000/$1,000 deduction is a reinvigoration of a deduction that came into play during the pandemic, when givers were able to deduct $600 (mfj) / $300 (single) above the line without needing to itemize. Let’s look at some of the key rules behind this, and then at how you might wish to utilize it:
- This deduction is taken “below the line,” meaning it does not reduce your adjusted gross income (AGI). This is different than the pandemic era deduction. It now effectively gets added to your standard deduction (thus the name “standard plus”). An above-the-line deduction is always better, as it has a lot of positive downfield ramifications, but this is a solid deduction, nonetheless.
- It can only be taken for cash gifts given directly to qualified charities. In other words, you cannot give donations of property (e.g. those Goodwill drop-offs won’t count) or appreciated assets (e.g. stock gifts), and you cannot make the donations into a Donor Advised Fund or “supporting organization.” Said another way, this is for those gifts where you write a check or pass along your credit card info to your favorite organization like the Red Cross, World Vision, your church, PTA, Little League, etc.
Who might want to use this? I’ll first back up and say that charitable gifts should always be given because you feel a desire to give and support organizations you care about. The tax benefits should be seen only as a bonus – but you’d be foolish to ignore them. So, who may find benefit from this:
- Those that give charitably but use the standard deduction because it provides the greater tax benefit. You now can a benefit from both. And recall from our last post that the standard deduction has grown for everyone, especially seniors, under the OBBBA.
- Those that do the bulk of their charitable giving through their IRA (Qualified Charitable Distributions) but still give some donations via cash. The QCD remains a very powerful and preferred tool (especially when you consider the next OBBBA provision discussed below), but you can now pair it with this new deduction to further reduce your tax burden.
- Those that want to start giving charitably but have been put off by the fact that no tax deduction would be enjoyed for their generosity.
The 0.5% disallowance (and more)
Let’s now turn our attention to the new (and very out of the blue) rule that disallows the first 0.5% of a taxpayer’s AGI from being deducted for charitable contributions when itemizing their deductions. For example, let’s say a couple has an AGI of $200,000 and they give away $20,000 in charitable gifts each year. The first $1,000 of charitable contributions (0.005 * 200,000) are not deductible, starting in 2026. So, instead of deducting $20,000, they can now only deduct $19,000. As a result, this couple, at a 22% marginal tax rate, will see their tax bill increase by $220. Life-changing? No. But an increase nonetheless, and one that you may want to plan for, especially if your AGI is higher. To illustrate, let’s look at another example. In this case, the couple has an AGI of $1,000,000 and contributes $80,000 per year to charity. For them, $5,000 of contributions will be disallowed, resulting in a $1,850 increase in their tax bill (37% tax rate).
But wait, there’s more (and unlike the informercials, it’s not a “good bonus” for high earners). For those in the 37% tax bracket, all itemized deductions (not just charitable contributions) will now be limited to a 35% deduction rather than 37% (starting in 2026). Let’s assume our $1 million AGI couple noted above has itemized deductions totaling $120,000 ($10,000 SALT, $30,000 mortgage interest, and $80,000 charitable). With none of these changes, they would get a tax benefit of up to $44,400. However, with the charitable adjustment and the tax rate limitation noted above, this benefit is reduced to $40,250 – a $4,150 change to the negative. As such, tax-wise givers in the upper tax brackets may want to strongly consider accelerating their 2026 giving into 2025, using tools like a Donor Advised Fund (plus the “standard plus” deduction detailed above). In doing so, they can avoid the double-negative that is coming in 2026 (and my mom, being a grammar-hound, always told me to avoid double-negatives!).
LET’S WRAP IT UP
As with anything, the exact recommendations are going to depend on your own circumstances, and careful planning is required. Thankfully, Congress has actually given us time this time around, as we have 5+ months to carefully consider, and act upon, each situation. Please reach out to us when you are ready to look at your own circumstances, as we stand ready to help (and we’ll be reaching out soon if you don’t catch us before then!). Now, return to your regularly scheduled summer programming!