Why 2025 Year-End Planning for Charitable Donations Matters More Than Ever
Taxpayers often use charitable giving as a means to two distinctly important ends: 1) to support causes in which they believe, and 2) to save money on income taxes. That latter purpose will change a bit with the passage of the One Big Beautiful Bill Act (OBBBA) this past July. While many of these changes do not take effect until 2026, the legislation makes 2025 a critical transition year, presenting a narrow window for taxpayers to evaluate whether accelerating, deferring, or restructuring charitable gifts could result in more favorable tax outcomes.
What Changed?
- Permanent 60% of AGI Limit for Cash Contributions First, the good. The OBBBA makes permanent the ability to deduct cash contributions to public charities of up to 60% of AGI. While this rule was previously scheduled to revert back to a 50% of AGI limitation, its permanence provides certainty for taxpayers who make large charitable gifts in high-income years.
- New Deduction Floor for Itemizers (Effective in 2026) Now, the bad. Beginning in 2026, charitable contributions will only be deductible to the extent they exceed 0.5% of adjusted gross income (AGI). For example, a taxpayer with $500,000 of AGI would not receive a charitable deduction for the first $2,500 of contributions made in a given year. Only amounts above that threshold would be deductible. This is a meaningful departure from current law, under which qualifying charitable contributions are generally deductible without a minimum floor.
- Reduced Tax Benefit for High-Income Taxpayers (Effective in 2026) For taxpayers in the highest income tax bracket, the value of charitable deductions will be modestly reduced even further. Under the new law, the effective tax benefit of charitable deductions for these individuals will be capped at 35%, rather than fully offsetting income taxed at the top marginal rate of 37%.
What Should You Do Now?
Because several of the most impactful changes to charitable deductions take effect in 2026, taxpayers have a unique opportunity before 12/31/2025 to more efficiently capture tax benefits for their charitable contributions by:
- Accelerating charitable contributions into 2025
Taxpayers who itemize may benefit from making anticipated future gifts before year-end 2025, allowing them to claim a full deduction without being subject to the new 0.5% AGI floor or tax benefit reduction rules.
- Bunching contributions to maximize deductions
Donors who give consistently each year may consider “bunching” multiple years’ worth of contributions into 2025 to increase itemized deductions, potentially through vehicles such as donor-advised funds. This strategy can preserve flexibility in grantmaking while capturing tax benefits under the current rules.
To Illustrate the points above, if a taxpayer earns $1,000,000 in income annually, a cash donation of $50,000 provides a federal tax benefit of $18,500 in tax year 2025, but that same donation in tax year 2026 provides a federal tax benefit of $15,750. Thus, the same donation saves you $2,750 more in federal income taxes if you make it before 1/1/2026.
What Should You Consider in the Future?
- Bunching contributions to maximize deductions
Even after the OBBBA limitations take effect beginning in 2026, bunching smaller annual donations every 2-3 years will likely be a more effective strategy moving forward, especially if typical annual donations are not materially above the 0.5% AGI limitation.
- Carefully plan larger donations in higher income years
Balancing the 0.5% AGI floor limitation as well as the 60% AGI ceiling limitation for cash donations to public charities will become an interesting dance, especially in high income years for taxpayers. Though the temptation will be to focus on avoiding the higher 0.5% AGI floor limit when income is abnormally high, there are certainly scenarios in which making a large donation in a high-income year is still more tax efficient than breaking up said donation over multiple lower-income years.
Bottom Line
The One Big Beautiful Bill Act introduces meaningful changes to tax strategies surrounding charitable giving. There are important tax savings to consider both before and after 12/31/2025. Thoughtful year-end planning can help ensure that charitable intentions and tax efficiency remain aligned, and consulting a tax expert when contemplating large donations has never been more important than it is now.
