Three case studies to illustrate the new One Big Beautiful Bill Act charitable tax provisions

The Tax Cuts and Jobs Act (TCJA) doubled the standard deduction, which greatly reduced the number of taxpayers itemizing their tax deductions. Other than a brief two-year window from 2020 to 2021, where taxpayers could claim a below-the-line charitable deduction under the Coronavirus Aid, Relief and Economic Security (CARES) Act, non-itemizers have not typically received a tax benefit from their charitable contributions. While the OBBBA made the enhanced standard deduction permanent, it also resurrected and expanded the CARES-era charitable deduction.

Starting in 2026, non-itemizers can deduct annually up to $1,000 ($2,000 for joint returns) in cash contributions made to public charities. The following gifts are not eligible: 1) noncash gifts (such as clothing or household goods), 2) gifts to §509(a)(3) supporting organizations and 3) gifts to donor advised funds (DAFs). Additionally, charitable carryovers from prior years are not eligible to be deducted under this non-itemizing provision. This new below-the-line deduction for non-itemizers is permanent.

What should our non-itemizing taxpayer know?

• Wait to contribute: The non-itemizing taxpayer receives no tax benefit from 2025 contributions. If possible, they should wait to make charitable gifts until tax year 2026.
• Increased gifts: The non-itemizing taxpayer can gift more for the same after-tax cost. For example, assume our non-itemizer is in the 24% tax bracket. If they historically gifted $100, their after-tax cost was $100 because the gift was nondeductible. Starting in 2026, the same taxpayer could gift $131.58 to their chosen charity for an after-tax cost of $100 ($131.58 x (1 - .24)). While the taxpayer is out-of-pocket the same amount of dollars, the charity gets an additional $31.58. The non-itemizer has effectively used the federal tax subsidy to benefit their favorite cause.
• Contemporaneous written acknowledgement: Contributions of $250 or more require contemporaneous written acknowledgement (CWA). This means that a taxpayer must receive an acknowledgment that specifies the amount of cash given and whether the donee provided any goods or services. The taxpayer must obtain this acknowledgement by the earlier of when they file their tax return claiming the deduction or the due date of the return. Many non-itemizers have not claimed charitable deductions for most of the past decade, so they may have forgotten about these requirements. The failure to obtain a CWA can result in denial of the charitable deduction. It should be noted that the CWA requirement is relevant to all of our case studies.

According to a 2022 Tax Policy Institute study, only approximately 10% of all taxpayers itemized their deductions in 2022. For taxpayers with adjusted gross incomes (AGI) between $100,000 and $500,000, that percentage more than doubles. Case study two focuses on the affluent itemizers who can roughly be defined as taxpayers who have AGIs ranging from $100,000 to roughly $625,000 (single) to $750,000 (married filing joint); who have net worths of less than a few million dollars; and who, most importantly, itemize their deductions. Examples of the affluent itemizer may include professionals (i.e., CPAs, attorneys, physicians and engineers), junior executives and individuals living in high tax states.

The charitably inclined affluent itemizer should be aware that a new charitable contribution floor may limit their charitable contributions starting in tax year 2026. Similar to how the existing limit on medical expenses works, only charitable contributions exceeding the 0.5% floor limitation are deductible. For example, a taxpayer with $400,000 of AGI will only be able to deduct charitable contributions exceeding $2,000 ($400,000 x 0.005) in tax years 2026 and beyond.

What should our affluent itemizer know?

• Accelerate contributions: The affluent itemizer receives a greater benefit from a 2025 deduction compared to a deduction in 2026 or later, so they should accelerate charitable contributions into 2025 to the extent possible. For example, a single taxpayer with $400,000 of AGI who wants to make a $5,000 charitable deduction would be able to deduct the full $5,000 contribution in tax year 2025. Assuming they are in the 35% marginal tax bracket, the deduction would save approximately $1,750 in tax. In contrast, if they wait and make that same charitable contribution in 2026, their deduction would be limited to $3,000 ($5,000 - $2,000 floor) and thus only save $1,050 of federal tax ($3,000 x 35%). By waiting to make their contribution in 2026, this taxpayer lost a significant portion of the tax benefit of their charitable contribution.
• Bunch gifts: Bunching charitable gifts via a DAF became a popular strategy following the implementation of TCJA. The idea is to make a large charitable gift to a DAF and take a corresponding deduction in a year in which the intent is to itemize and then pay charitable contributions from the DAF in years when the taxpayer claims the standard deduction. This strategy leverages the enhanced standard deduction. Given that the OBBBA extended the enhanced TCJA standard deduction, bunching remains an effective strategy.

Bunching can also be an effective strategy for managing the impact of the new charitable floor. If the taxpayer intends to contribute $5,000 annually to their favorite charity over the next four years (2026-2029), simply donating $5,000 annually results in significant loss of their charitable deduction. Each year, $2,000 of deduction is limited by the floor, resulting in $8,000 in lost charitable deductions over the four-year period. At a 35% marginal rate, that costs the taxpayer an additional $2,800 in tax. Alternatively, the taxpayer could bunch the $20,000 charitable gift into a single year by donating to a DAF. Assuming a single taxpayer with $400,000 of AGI, the floor would limit the deductible amount of this gift to $18,000 ($20,000 gift - $2,000 floor). The floor still costs this taxpayer $700 in additional tax, but this is a better result than the $2,800 of additional tax without bunching. Bunching enables the affluent itemizer to preserve much of the tax benefit of their charitable contributions.

• Bunch and accelerate gifts: Continuing the above example, if the affluent itemizer is willing and able to accelerate their intended gift into 2025, they can avoid the application of the charitable floor limitation entirely. The charitable floor limitation takes effect for the 2026 tax year. A 2025 gift of $20,000 to a DAF avoids the new floor limitation, allows the taxpayer a current year deduction and gives the taxpayer the ability to pay out donations from the DAF in future years. Bunching and accelerating gifts into 2025 saves this particular taxpayer $2,800 in tax.
• Donate appreciated assets: Although not a new strategy, donating appreciated assets is still an effective charitable giving tax strategy, maybe more so following the OBBBA. By donating an asset (such as a stock) that is long-term capital gain property (i.e., held for over a year), a taxpayer not only receives a charitable deduction in the amount of the asset’s fair market value, but they also avoid paying tax on the gain. Even if the taxpayer’s charitable deduction is limited by the floor, the avoidance of paying tax on the sale of the donated asset is still valuable to the affluent itemizer.

The taxpayer for case study three is a HNW individual with AGIs that put them in the top 37% marginal bracket and who possess significant net worth ($10 million plus). For these HNW taxpayers, the new OBBBA charitable provisions require careful attention.

The new charitable floor previously explained will also have significant implications for our HNW taxpayer. As incomes rise, the floor limitation also increases, thus significantly limiting the tax benefit of making charitable contributions. For example, a taxpayer with an AGI of $10,000,000 can only deduct charitable contributions exceeding $50,000 ($10,000,000 x 0.005). Stated differently, this taxpayer receives no tax benefit from the first $50,000 of contributions.

Not only do HNW taxpayers need to contend with the charitable floor, but they also are likely subject to the new overall limit on itemized deductions. OBBBA permanently repealed the Pease limitation on itemized deductions, but starting with the 2026 tax year, it introduced a new overall limit on itemized deductions for taxpayers in the top 37% tax bracket. Most HNW taxpayers reside in the top tax bracket and will be subject to this new itemized deduction limitation. The new limit cuts the tax benefit from itemized deductions by 2%, effectively limiting the benefit from itemized deductions to a maximum of 35%. 

To illustrate, let’s consider a HNW taxpayer with $1,000,000 of AGI who wants to make a $100,000 charitable contribution. Due to the combination of the charitable floor limitation and the overall itemized deduction limitation, the below chart illustrates that these new OBBBA provisions result in a 10% reduction in tax benefit on the same gift made in 2026 versus 2025. 

What should our HNW taxpayer know?

• Accelerate contributions: As the chart illustrates, a HNW taxpayer loses 10% of the tax benefit of their gift due to new OBBBA provisions. The good news is that these provisions do not apply until tax year 2026. Taxpayers have until the end of 2025 to accelerate future charitable gifting to avoid the new OBBBA limitations. Acceleration of charitable gifts could be done outright, through a DAF, through a private foundation or some combination of the above.
• Bunch and time gifts: The same bunching strategies applicable in case study two apply for HNW taxpayers. Additionally, HNW taxpayers may want to carefully time their gifts. Historically, HNW taxpayers often made larger charitable gifts in years with high income (such as in the year of a sale of a significant asset). Post OBBBA, this may not maximize the tax benefit from their deduction. Assuming the same tax rate applies, it could make sense to time the charitable deduction in other years when income, and thus the charitable floor, is lower. Of course, depending upon the size of the gift, the maximum AGI limits on charitable contributions also need to be factored into the analysis to ensure no loss of deductions.
• Charitable trusts: The new charitable floor does not appear to apply to trusts, only individuals. HNW taxpayers may consider establishing trusts as part of their program of planned giving. For example, a nongrantor charitable lead trust could fund a stream of charitable payments for a set number of years, the corresponding charitable deduction could offset taxable investment income within the trust, and the resulting growth of trust assets could be passed on to noncharitable beneficiaries as one component of a well devised estate plan. Trusts can only claim a charitable deduction under specific circumstances, so careful drafting done by an estate planning attorney familiar with these rules is critical.
• Donate appreciated assets: Similar to case study two, HNW taxpayers benefit from donating appreciated assets. Given the larger investment portfolios of many HNW taxpayers, this strategy could produce even greater tax benefits.
• Pre-transaction planning: Many exiting business owners desire to reduce the tax consequences of the sale of their business while also establishing a charitable legacy. In an advanced form of donating appreciated assets, business owners can make a charitable gift of business assets ahead of a sale. If structured correctly, this enables not only a fair market value deduction, but it can shift taxable gain to a nonprofit not subject to tax. The key to this strategy is planning well ahead of an anticipated sale to avoid pitfalls such as an assignment of income issue.  
• Forgo charitable deductions: There has been a shift among some HNW families to forgo charitable deductions in favor of maintaining control and flexibility over their assets. Through charitably-minded business entities (like an LLC), HNW individuals can invest and manage assets free from the constraints applicable to exempt entities while pursuing causes and projects they feel are the most beneficial to society. The additional limits on charitable deductions introduced by the OBBBA may further fuel this strategy.