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The One Big Beautiful Bill Act ("OBBBA") brings major changes to federal charitable deduction rules beginning January 1, 2026. These changes reduce the tax value of charitable giving for many high-income individuals and introduce new limitations on itemized deductions. By contrast, the rules governing the 2025 tax year remain significantly more favorable. For donors, especially those who regularly itemize deductions or expect higher income in 2025, there is a significant opportunity to accelerate charitable giving before the new restrictions take effect.
2025 may be the optimal year to make larger charitable gifts, including through the use of Donor-Advised Funds ("DAFs") for donors who intend to give over multiple years but may not yet know which charities they wish to support.
Key Changes to Charitable Deduction Rules Beginning in 2026
Beginning in 2026, itemizers will face a new 0.5% AGI "floor" on charitable deductions. This means that only the portion of total charitable contributions that exceeds 0.5% of adjusted gross income will be deductible. For example, a taxpayer with $1,000,000 in AGI would lose the deduction on the first $5,000 of charitable giving. In 2025, however, every deductible dollar counts, subject only to the longstanding AGI percentage limits.
The OBBBA also reduces the marginal value of charitable deductions for top-bracket taxpayers. Under current law, donors in the highest bracket receive a deduction that offsets tax at approximately 37%. Beginning in 2026, the value of that same deduction will fall to roughly 35%, modestly increasing the net after-tax cost of each dollar given.
For non-itemizers, the OBBBA creates a new above-the-line charitable deduction, up to $1,000 for single filers and $2,000 for married filing jointly, for cash gifts to public charities. This deduction does not apply to contributions to DAFs or supporting organizations, which is important for planning purposes.
Finally, the OBBBA makes permanent the existing 60% of AGI limit for cash gifts to public charities. While this is helpful for large donors, its benefit is tempered by the introduction of the AGI floor and the reduction in marginal deductibility described above.
Why Many Donors Should Give in 2025
Given the upcoming changes, 2025 provides several compelling advantages. First, charitable gifts made in 2025 are not subject to the new AGI floor, meaning donors retain the full deductibility of their contributions. Second, donors can "lock in" the higher deduction benefit associated with the current marginal tax rates, which will decline beginning in 2026. This difference may be significant for donors who typically give large amounts or who expect particularly high income in 2025.
Accelerating charitable gifts can also be beneficial for donors engaged in multi-year philanthropic programs. A larger gift in 2025 can secure a more valuable deduction today, while charitable distributions can be made more gradually over future years. Likewise, clients expecting major income events in 2025, such as QSBS or business-sale gains, large trust distributions, or stock option exercises, may achieve greater tax efficiency by aligning charitable gifts with the high-income year.
Any gifts deferred into 2026 or later years will face both the AGI floor and the lower marginal tax benefit, effectively increasing the long-term cost of maintaining a charitable giving strategy.
Multi-Year Philanthropy: Using a Donor-Advised Fund (DAF) in 2025
A Donor-Advised Fund is an especially valuable planning vehicle for donors who intend to give over multiple years but do not yet have a specific list of charities in mind. By contributing to a DAF in 2025, the donor receives an immediate income-tax deduction under the more favorable current rules, even if actual charitable grants are made years later.
A DAF is particularly helpful because it allows donors to "capture" the 2025 deduction while preserving complete flexibility. Once the contribution is made, the funds can be invested and may grow tax-free. The donor can recommend grants over time, involve family members in giving decisions, and support evolving charitable priorities without being rushed to select recipients in the current year.
Benefits of using a DAF in 2025 include:
- securing the full 2025 deduction at higher marginal rates,
- avoiding the AGI floor that begins in 2026,
- retaining discretion to direct grants to charities in future years,
- smoothing annual grantmaking while optimizing a single deduction year.
Example: A donor who intends to give $50,000 per year for five years could instead contribute $250,000 to a DAF in 2025. The donor would deduct the entire amount in 2025 (subject to the existing AGI percentage limits) and then recommend $50,000 in grants annually beginning in 2026. This approach maintains the donor's charitable impact while maximizing tax efficiency.
Additional Planning Opportunity: Charitable Trusts
Donors interested in more advanced strategies may also consider charitable trusts, such as Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs). A CLT provides an immediate or scheduled stream of payments to charity for a set term, with any remaining assets passing to heirs, often at a reduced gift or estate tax cost. A CRT works in the opposite direction, offering the donor or family members an income stream for life or for a term of years, with the remainder ultimately benefiting charity.
Both CLTs and CRTs can generate meaningful income-tax deductions, provide long-term philanthropic impact, and integrate seamlessly with broader wealth-transfer planning. They offer an additional option for donors who want both charitable outcomes and strategic financial benefits.
Action Items Before Year-End 2025
Donors should review whether accelerating charitable gifts into 2025 will produce meaningful tax savings, particularly if higher income is expected this year. Establishing and funding a DAF in 2025 can be especially effective. Donors should coordinate with their CPA or financial advisor to model 2025 versus 2026 outcomes, confirm AGI projections, and ensure all 2025 gifts are properly documented with timely acknowledgments.
Charitable planning must be tailored to each donor's tax, financial, and estate planning goals. Donors should consult their CPA, financial advisor, and legal counsel before implementing any strategies described in this alert. This material is for informational purposes only and is not tax or legal advice.
The OBBBA will reduce the after-tax benefit of charitable giving beginning in 2026. For many donors, particularly those with multi-year philanthropic plans, 2025 is the most advantageous year to make larger or accelerated charitable gifts. Whether contributing directly to charities or using a DAF for future grantmaking, acting before year-end 2025 can significantly enhance tax efficiency.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
