Unwrap the New Tax Rules for Charitable Donations

The holiday season is right around the corner, and that's when many charitably inclined people start to think about year-end donations to their favorite charities. When planning your charitable contributions, don't forget about the potential tax breaks for your generosity.  

The tax rules for these breaks have changed somewhat under the One Big Beautiful Bill Act (OBBBA), which was enacted on July 4. While the OBBBA imposes new limits on charitable deductions for individuals who itemize, it opens up new opportunities for those who don't itemize and claim the standard deduction. Depending on your situation, you may decide to give more to charities in 2025 or wait until 2026 to increase your donations.

Charitable Deduction Limits

Start with this basic premise. Generally, you can deduct the full amount of monetary contributions you give to qualified charities on your personal tax return if you meet the strict recordkeeping requirements imposed by the IRS. Written acknowledgements from the charities must substantiate monetary contributions of $250 or more.

However, the deductible contributions made to public charities can't exceed 60% of your adjusted gross income (AGI). Any remainder may be carried forward for up to five years. The Tax Cuts and Jobs Act (TCJA) raised the limit from 50% of AGI, beginning in 2018 and ending in 2025. Now the OBBBA permanently extends this higher ceiling.  

Another key limit applies to charitable gifts of property. The annual total for these contributions can't exceed 30% of your AGI. Again, any remainder is carried forward for up to five years.

For example, suppose your AGI for 2025 is $100,000. You make monetary contributions of $10,000 during the year and donate a family heirloom valued at $40,000. As a result, you can deduct the full $10,000 in monetary contributions, and your gift of property is limited to $30,000. Your total deduction for 2025 is $40,000, with $10,000 being carried over to 2026.

Note that in 2025, deductions can only be claimed if you itemize deductions on your personal tax return.

Basic Year-End Strategies

If you itemize deductions, any extra contributions you make at the end of the year boost your overall deduction. On the other hand, it doesn't make tax sense to make contributions in a tax year in which you expect to have a low tax liability or you won't be itemizing. The trick is to "bunch" your donations in a year that does you the most tax good.

This is especially true if you intend to give a gift of appreciated property with substantial current value. Assuming you've owned the property longer than one year, you can deduct the fair market value (FMV) of the property on the date of the donation instead of its initial cost. Thus, you should generally save this donation for a year that counts for tax purposes.

Due to a combination of changes for individuals in the TCJA, you may have claimed the standard deduction for the last few years instead of itemizing. This can have a significant impact on your gift-giving strategies for 2025. 

Practical approach: As the year draws to a close, estimate your tax liability. (Your professional tax advisor can help you take a stab at it.) If it appears that you'll be itemizing deductions in 2025, you might step up your charitable gift-giving to get more bang for your buck. For instance, you may move donations planned for 2026 into 2025. This bunching strategy is comparable to the way some individuals treat discretionary medical expenses to qualify for the medical expense deduction.

Conversely, suppose you don't expect your itemized deductions for 2025 to exceed your standard deduction, even with charitable donations figured in. In that case, you may as well postpone the donations to next year when your situation may change.

Factor in the New Law    

The OBBBA adds a few extra twists and turns to the mix. For the first time, the new tax law installs a "floor" on charitable deduction for itemizers, effectively reducing their annual write-off. At the same time, the OBBBA provides new tax incentives for non-itemizers.

1. New deduction floor. Charitable deductions are limited to the excess above 0.5% of your AGI. This operates like the 7.5%-of-AGI floor for medical expense deductions. So, if your AGI is $100,000 and you donate $5,000 during the year, your deduction is reduced to $4,500. The disallowed portion may be carried forward to the next year (subject to the annual floor).

In addition, the OBBBA revives a modified version of the "Pease rule," slightly reducing itemized deductions for high-income taxpayers. The Pease rule was suspended from 2018 through 2025. Under the new rules, deductions for those in the top 37% tax bracket can't exceed deductions at the 35% rate.

These changes take effect in 2026. As a result, itemizers may step up gift-giving at the end of the year, including making contributions to donor-advised funds, to avoid the 0.5% floor and/or 35% cap in 2026.

2. New deduction for non-itemizers. A deduction for non-itemizers has been permanently added. Beginning in 2026, single filers can deduct up to $1,000, while joint filers may write off up to $2,000. Unlike the charitable deduction for itemizers, there's no floor on deductions. However, only cash donations qualify.

If you're someone who routinely takes the standard deduction and doesn't expect things to change, this decision is a no-brainer from a tax perspective. Postpone your charitable donations until 2026, when you can realize a tax benefit on your return.

Although it hasn't received much attention in the media, the OBBBA also carves out a new tax credit for donations to specific organizations offering school vouchers, beginning in 2027. Under the new law, an individual can claim a credit of up to $1,700 for donations to organizations that grant scholarships to K-12 private or religious schools. This credit is available whether or not you itemize.

Wrapping Things Up

Finally, be aware that other special rules may affect deductions for charitable donations. For instance, if you give property to a charity, the property must be used in furtherance of the organization's charitable mission. Also, an independent appraisal is required for donations of property valued above $5,000.

Contact your tax advisor for more information. With a helping hand, you can develop a plan that maximizes the tax benefits for your situation.