Editor’s Note: This article is the first in a new column, Personal Financial Planning, covering the role of CPAs in advising individuals and families on how to meet their financial goals.
Public Law 119-21, passed on July 4, 2025, the so-called “One Big Beautiful Bill Act” (OBBBA), introduced significant changes that will affect individuals making charitable gifts. OBBBA provides an opportunity for small cash donors and an additional limit for larger donors. Historically, charitable giving has had annual limitations on what was considered deductible, in terms of income taxation. These limits largely depend upon the type of gift made (e.g., cash, stock) and the type of organization (e.g., public charity, private foundation) receiving the gift. While those limits still apply, OBBBA has added an additional layer of complexity that prospective donors must navigate.
Special Rule for Taxpayers Who Elect Not to Itemize
Under current law, only taxpayers who elect to itemize can receive a charitable income tax deduction. For taxable years beginning after December 31, 2025, section 70424 of OBBBA creates a permanent deduction under IRC § 170(p) for taxpayers who do not elect to itemize. This is a below-the-line deduction that is deducted in addition to the standard deduction. Next year, non-itemizers can take a deduction up to $1,000, and joint filers up to $2,000, for contributions made in cash. Contributions carried forward from prior years do not qualify, and any excess contributions over the $1,000/$2,000 limit are not carried forward for this special deduction. The organization receiving the gift must be one described in IRC § 170(b)(1)(A) (i.e., public charities). This deduction cannot be taken for contributions to supporting organizations described in IRC § 509(a)(3), or for the establishment of a new donor advised fund (DAF), or the maintenance of an existing DAF. Lastly, this deduction is determined without regard to the new 0.5% floor discussed below.
The 0.5% Charitable Floor for Individual Donors
For taxable years beginning after December 31, 2025, section 70425 of OBBBA imposes a floor on charitable contributions. A taxpayer’s charitable contribution is allowed only to the extent that the aggregate amount exceeds 0.5% of the taxpayer’s “contribution base” (i.e., AGI) under IRC § 170(b) (1)(I). In addition, contributions disallowed by the 0.5% floor are carried forward only from years in which the applicable percentage limits are exceeded (e.g., 60% for cash, 30% for capital gain). Under IRC § 170(d)(1)(C), if a taxpayer made contributions of exactly 0.5% of their AGI, there is no itemized deduction, nor is there a carry forward available. If the contributions exceed the applicable percentage limits, excess amounts carried forward for another five years are increased by the amount disallowed under IRC § 170(b)(1)(I). Therefore, it may be advantageous to make an additional gift before year-end, especially a small one that would exceed the applicable percentage limits. This can produce a carryover that could help meet the 0.5% floor for the following year. New Treasury Regulations and examples are to be expected to help interpret and understand these new provisions.
OBBBA Flips the Ordering of the Deductions
When a taxpayer is subject to the 0.5% floor, OBBBA requires that charitable contributions be taken into account in the following order:
- First, capital gain property to organizations not described in subparagraph (A) (e.g., private non-operating foundation where the 20% AGI limit may apply).
- Second, capital gain property to organizations described in subparagraph (A) (e.g., public charity where the 30% AGI limit may apply).
- Third, other contributions (non–capital gain property) made to non-public charities (e.g., cash donated to a private non-operating foundation where the 30% AGI limit applies).
- Fourth, qualified conservation contributions (e.g., conservation contributions where the 50% AGI limit, or the 100% limit, for qualified farmers, may apply).
- Fifth, contributions to organizations described in subparagraph (A) [e.g., non-cash, ordinary income property, or long-term capital gain (LTCG) property with an election to use basis donated to a public charity where the 50% AGI limit applies].
- Sixth, contributions to where subparagraph (G) applies (e.g., cash contributions made to a public charity where the 60% AGI limit is applicable) [see IRC §§170(b)(1)(I)(i)–(vi)].
This ordering ensures that deductions with the lowest AGI limitations are applied first to the 0.5% floor. This can maximize the taxpayer’s charitable deduction, but it represents a total reversal of the order many CPAs considered when they completed worksheet 2 in IRS Publication 526.
New Limitation on the Benefit of Itemized Deductions
Section 70111 of OBBBA permanently repeals the “Pease” limitation, which was scheduled to come back into effect in 2026. Unlike the Pease limitation, the new limitation can apply to deductions for medical, investment interest, or casualty and theft losses. This limitation applies to taxable years beginning after December 31, 2026. The intent of this new provision is to reduce the tax deduction benefit for taxpayers in the highest ordinary income tax bracket. For a taxpayer with taxable income that (before any reduction for itemized deductions) exceeds the dollar amount at which the 37% tax rate bracket begins, this provision generally caps the tax-reducing value of each dollar of otherwise allowable itemized deductions at 35 cents. This new provision may apply to estates and trusts as well, because it does not contain an exception like the previous Pease limitation had under IRC § 68(e).
The new IRC § 68 provision works as follows: An individual taxpayer’s otherwise allowable itemized deduction for the year (determined without regard to this new section) is reduced by 2/37th of the lesser of: 1) their total itemized deductions, or 2) the amount of their taxable income that exceeds the dollar amount at which the 37% tax bracket begins. This limitation is coordinated with all other limitations on the allowance of itemized deductions (e.g., the $10,000 “SALT cap”).
These limitations are best understood with an example. Note that a revenue procedure setting forth the inflation-adjusted items for 2026, such as income tax brackets, was not available at the time of this writing, therefore the 2025 tax brackets are used here instead. For 2025, the 37% bracket begins at $751,600 for married individuals filing jointly.
Example: Ralph and Alice have $1,000,000 of Adjusted Gross Income (AGI) for 2025. Their income is entirely ordinary-type income, and they are subject to a 37% marginal income tax rate. They donated $100,000 of long-term capital gain property to a public charity. For simplicity, assume they have no other deductions other than a $10,000 state and local tax deduction. Before any adjustment, they have $110,000 in itemized deductions to consider for the year.
The 0.5% charity floor would first apply and would permit charitable deductions above $5,000 (0.5% of their $1,000,000 AGI). Their tentative itemized deduction would then be $105,000, consisting of their adjusted charitable gift of $95,000 and the $10,000 SALT deduction.
The $105,000 tentative itemized deduction would be decreased further by the lesser of 1) $5,676 (2/37th, or simply 5.41%, of $105,000), or 2) $7,758 {[($1,000,000 – $105,000) – $751,600)] × 5.41%}. In this example, their total itemized deduction of $110,000 (charity + SALT) were reduced by $5,000 for the 0.5% charitable floor, and again by $5,676. This brings Ralph and Alice’s allowable itemized deductions down to $99,324.
Charitable Planning
When the Tax Cuts and Jobs Act of 2017 doubled the standard deduction, it encouraged a giving concept known as “bunching.” Instead of making charitable gifts every year, it could be more advantageous to bunch one’s charitable deductions for several years into one taxable year. This could prove beneficial, especially if the taxpayer expected to be using the standard deduction. The bunching could allow them to itemize and receive an income tax benefit. This strategy frequently incorporated DAFs as well. Instead of donating $5,000 to a charity each year, the taxpayer would donate $25,000 to a DAF (five years’ worth of donations) in a single year. This larger donation would allow them to itemize for that year. Then, through their advisory privileges, they could distribute $5,000 every year from the DAF to a chosen charity over the next five years.
While bunching may help alleviate the new 0.5% hurdle, taxpayers still have to contend with the overall itemized deduction limit under IRC § 68. To alleviate this predicament, older taxpayers may consider the use of Qualified Charitable Distributions (QCD). Under IRC § 408(d)(8), QCDs made directly from an IRA to charity can be excluded from gross income. An exclusion from gross income does not have the limitations as an itemized deduction. It also reduces AGI, which can help with other deduction or credit phaseouts that are based on AGI. But QCDs may only be made from IRAs (and even inherited IRAs) for account owners (or an inherited IRA beneficiary) who have attained the age of 70½. These distributions can be quite sizable. The Secure 2.0 Act of 2022 indexed the maximum QCD limit of $100,000 for inflation (i.e., $105,000 for 2024, $108,000 for 2025). This limit is per taxpayer, so in the example above, both Ralph and Alice could each exclude this amount.
CPAs are in a great position to run projections for clients to determine if there could be a benefit to accelerating charitable contributions into the 2025 tax year. In addition, they can also remind clients of the benefits of QCDs, DAFs, or additional gifts to preserve a charitable carryover.
