by Mary Lago, CFP®, CTFA
Chief Wealth Strategist
Principal
The tax act, adopted on July 4 of this year, extended or made permanent many personal income tax provisions and included significant changes for optimizing charitable giving strategies. The key changes to charitable income tax deductions for individuals that become effective in 2026 are highlighted below but must be considered in the broader context of other tax opportunities.
Taxpayers will generally choose to itemize their deductions if their available deductions exceed the standard deduction. The standard deduction, which was meaningfully increased by the Tax Cuts and Jobs Act (TCJA) in 2017, has received annual inflation adjustments and will be increased again for 2025 by the OBBBA to $15,750 for individual tax filers and $31,500 for those who are married filing jointly (MFJ).
Charitable deductions for non-itemized tax filers:
Traditionally, non-itemizers have not received an additional tax benefit for their charitable contributions because they were already assumed to have a base level of deductions, via the standard deduction. Starting in 2026, those who claim the standard deduction will also be able to claim charitable deductions up to $1,000 for individual tax filers and $2,000 for MFJ for cash gifts made to public charities.
A new floor and a permanent increase in the maximum charitable deduction:
Taxpayers who itemize deductions on their tax returns are subject to both minimum and maximum contribution limits. The OBBBA introduced a new floor on charitable deductions, meaning that itemized filers may only deduct charitable contributions to the degree they exceed 0.5% of their adjusted gross income (AGI).
For example, starting in 2026, a taxpayer who earns $300,000 may not deduct the first $1,500 (0.5% x $300,000) of their charitable contributions for the given year. Interestingly, so long as the taxpayer exceeds the floor for the year (in the example, exceed $1,500), then the amount under the floor ($1,500 in the example), may be carried forward and applied to future years. Taxpayers are also restricted from offsetting more than 60% of their AGI through charitable deductions.
This limit was scheduled to shrink back to the pre-Tax Cuts and Jobs Act amount of 50%, but the higher 60% limit has now been made “permanent.” Contributing appreciated assets, such as stocks that have increased in value, has the double benefit of avoiding capital gains and sheltering income from taxation. Contributions of appreciated assets may be deducted up to 30% of AGI, while the balance of up to 60% must be made in cash. Tax deductions for gifts in excess of these limits may be carried forward for up to five additional years. To avoid this new 0.5% floor, taxpayers may wish to consider larger gifts in 2025.
Value of tax savings capped at 35% rather than the top income tax rate of 37%:
While the ability to deduct up to 60% of taxpayers’ AGI may encourage larger charitable gifts, the OBBBA also caps the value of charitable-deductions at 35 cents per dollar. In other words, high income earners who are in the 37% federal tax bracket will receive a maximum tax deduction of 35%. For example, assume a MFJ couple who earn $1 million are in the 37% federal tax bracket and make a charitable gift of $100,000.
The tax benefit of their gift will be limited to $35,000 rather than $37,000 due to the cap of 35%. Because this provision goes into effect in 2026, high-income earners may want to accelerate sizable charitable gifts into 2025 to match the value of the charitable deduction to their effective tax rate.
As always, there are many ways to be strategic to maximize the tax benefits of your charitable giving, including the use of donor-advised funds, qualified charitable distributions and other charitable vehicles. We encourage you to work closely with your tax professional and portfolio manager to consider potential opportunities to enhance your giving strategy for 2025, 2026 and beyond.
Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.