Going into the end of the year, I am having alot of conversations around charitable planning. As I started to write the blog, I decided to just use the information I got from https://taxfoundation.org/blog/charitable-deduction-big-beautiful-bill/
All Credit to Emily Kraschel and Erica York for the article. Thank you!
Key Points
- For non-itemizers, the One Big Beautiful Bill Act (OBBBA) increases the standard deduction and adds an above-the-line deduction for charitable donations.
- For itemizers, the OBBBA creates a floor on the charitable deduction and a limitation on the value of all itemized deductions for taxpayers in the top bracket.
- Many limitations don’t take effect until 2026, so taxpayers may bunch their charitable giving in 2025 to take advantage of the delay
As the year comes to a close, many taxpayers are considering how to handle their end-of-year donations. TheOne Big Beautiful Bill Act(OBBBA), passed earlier this year, contains several key policies that will affect how many taxpayers itemize, and how itemizers may benefit from deducting charitable donations.
OBBBA Changes for Non-Itemizers
The OBBBA makes permanent andexpandstheTaxCuts and Jobs Act’s (TCJA) temporary increase to thestandard deduction.
The expansion takes effect for tax year 2025, and the standard deduction will be $15,750 for single filers and $31,500 for joint filers in 2025 (andinflation-adjusted thereafter). Tax Foundation estimates nearly86 percentof taxpayers will take the standard deduction in 2026, an increase from projections under TCJA policy.
Taxpayers who take the standard deduction have not typically been able to deduct their charitable donations on their tax returns. The OBBBA, however, creates a permanent above-the-line deduction for charitable donations of $1,000 per filer who takes the standard deduction beginning in tax year 2026.
A similar policy was temporarily made available during the pandemic, supplying a $300 deduction per filer for non-itemizers. At that time,29.4percent of filers who used the standard deduction opted to take it, indicating that the OBBBA’s even larger deduction could be popular.
OBBBA Changes for Itemizers
For itemizers, the OBBBA introduces or makes permanent several deduction limitations.
First, it imposes a new floor on the deduction for charitable contributions. Starting in 2026, charitable donations below 0.5 percent of adjustedgross income(AGI) will not be deductible.
Take, for example, a taxpayer with $200,000 in AGI and $10,000 in charitable giving. The first $1,000 of the taxpayer’s charitable giving would not be deductible (calculated by multiplying their $200,000 of income by 0.5 percent), but anything over that amount—in this case, the remaining $9,000—would be.
Second, the OBBBA makes permanent the TCJA’s increase of the deduction limit for cash charitable contributions to 60 percent, while retaining the 50 percent limit for non-cash contributions. Under ordering rules, cash gifts are deducted before non-cash gifts, curbing the applicability of the higher limit for those who make both cash and non-cash donations.
Under the OBBBA, a new limitation on the tax benefit of itemized deductions for taxpayers in the highest tax bracket will take effect in 2026. The new rule limits the value of itemized deductions to 35 cents per dollar, rather than the 37 cents that’s normal for the top bracket. For purposes of the limitation, taxpayers determine their income by adding itemized deductions to AGI, raising the referenced income. Then they reduce their itemized deductions by taking 2/37 of the lesser of either their itemized deductions or their income that exceeds the 37 percent tax bracket.
For example, consider a taxpayer with an AGI of $800,000 and $100,000 in itemized deductions. They have an adjusted income of $900,000, with about $290,000 falling into the top bracket. The limitation applies to the lesser amount, so the taxpayer must reduce their itemized deductions by 2/37thsto $94,594.
Third (and finally), the new law temporarily increases the limitation on theitemized deductionfor state and local taxes (SALT) paid to $40,000. That higher limit phases down to $10,000 starting at $500,000 and ending at $600,000 of income. The limit value and phaseout threshold will increase by 1 percent per year through 2029, and the limit will return to $10,000 after 2029.
Some taxpayers may adapt their donation strategy to maximize tax benefits, for instance, by frontloading their giving into 2025 to avoid the new floor on charitable deductions and limitation on overall itemized deductions that both begin in 2026.
Other Changes
The OBBBA also added a new tax credit of up to $1,700 for charitable contributions to scholarship-granting organizations for elementary and secondary education scholarships. The credit is non-refundable, so it may reduce tax liability, but not below zero. It applies to contributions received beginning in 2027.
Separately, the OBBBA introduces a 1 percent floor on the deduction for charitable contributions made by corporations.
The Long View
The anticipated reduction in itemization, plus new limitations on the value of itemized deductions, will reduce the tax benefits of charitable giving for higher-income taxpayers. However, the new above-the-line deduction for non-itemizers will increase the tax benefits of charitable giving for taxpayers who previously did not have an incentive for giving. The above-the-line deduction for non-itemizers will reduce revenue by about $74 billion from 2025 through 2034, while the new floor on charitable deductions for individuals will raise $63 billion, indicating a near wash in terms of the overall revenue effects of these two changes. In the near term, the delay in new limitations is likely to drive frontloading of donations.