Charitable Deduction Planning Opportunity before 2025 Year End

by Neal Wadley

The One Big Beautiful Bill Act (OBBBA) passed this year had many favorable tax provisions but also included some limitations on charitable deductions starting in 2026 that could result in unexpected tax increases.  However, there are ways families that itemize their deductions can maximize their tax benefit from charitable contributions before the new laws take effect.   

The applicable limitations beginning in 2026 for taxpayers who itemize deductions are: 

1) Charitable Deduction Floor 

Contributions to charity are only deductible to the extent they exceed 0.5% of the taxpayer’s Adjusted Gross Income (AGI).   

2) Overall Itemized Deduction Limitation 

For taxpayers in the 37% marginal tax bracket, the benefit of their overall itemized deductions is effectively capped at 35%.  Itemized deductions are reduced by the lesser of:   

• 2/37ths of the amount of total otherwise allowable itemized deductions, or 

• 2/37ths of the amount taxable income plus itemized deductions exceeds the dollar threshold for the 37% marginal tax bracket. 

Practical Example #1 

A married couple with AGI of $400,000 makes $15,000 annual cash contributions to charity. In 2026, their charitable deduction will be limited to $13,000 due to the charitable deduction floor (i.e., 0.5% x $400,000 = $2,000 floor; only contributions exceeding this are deductible).  

Practical Example #2 

A married couple with AGI of $1,000,000 makes $100,000 annual contributions of appreciated stock to charity. In 2026, their charitable deduction will be reduced by the charitable deduction floor (0.5% x $1,000,000 = $5,000 floor; remaining allowable deduction of $95,000) AND the overall limit on itemized deductions (2/37 x $95,000 = $5,135).  Their total charitable deduction will be limited to $89,865 (i.e., $10,135 of deduction lost).  

Planning Opportunity: The families could prefund several years’ worth of annual charitable contributions to a donor advised fund (DAF) in 2025 and take the full charitable deduction before the laws take effect in 2026. They would then make their annual grants to charity from the DAF. 

• Example #1 Illustration: 3 years of contributions to a DAF in 2025 = $45,000. Charitable deduction preserved = $6,000 (3 years x $2,000 floor).   

• Example #2 Illustration: 3 years of contributions to a DAF in 2025 = $300,000. Charitable deduction preserved = $30,405 (3 years x $10,135 reduction).   

• Note:  Cash contributions to a DAF (public charity) are limited to 60% of AGI ($240,000 in Example #1) and appreciated stock gifts to a DAF are limited to 30% of AGI ($300,000 in Example #2). Charitable contributions exceeding these limits can be carried forward 5 years but would be subject to the 0.5% floor and overall itemized deduction limitation.