How Recent Changes to The Charitable Deduction Tax Code Impact You

I’ve spent the past 20+ years working with financially successful families, and one of the things that almost all of them have in common is a desire and a willingness to support organizations they care about.

Our tax code recognizes the importance of doing this by creating tax incentives that align with charitable giving, which make the recent changes to the tax code around charitable deductions particularly important to high-net-worth families.

Enacted under the 2025 tax law and showing up on 2026 tax returns, taxpayers will find themselves subject to 3 new rules worth understanding:

1)      0.5% of AGI Floor for Itemizers

2)      Deduction Value Cap for Top-Bracket Earners (deductions capped at a 35% benefit even though you are in the 37% bracket)

3)      Above-the-Line Deduction for Non-Itemizers ($1K for individuals and $2K for married couples)

Items #2 and #3 are straightforward and self-explanatory. Item #1 is somewhat counterintuitive and not straightforward, making it the basis for today’s discussion.

The simplest explanation of what a ‘0.5% of AGI Floor’ means for taxpayers is best illustrated through an example: taxpayers with an AGI of $200,000 must give more than $1,000 to charity before any of their donations become deductible. Here’s where that becomes a consideration in long-term financial planning…

Let’s say you sell an asset (stocks, bonds, real estate, a business interest) and have an AGI of $1M this year. You plan to give $10K to charity. Only $5K of that is deductible (above the 0.5% floor). Next year, you defer your other sources of income (Social Security, IRA withdrawals) and live off of the interest & dividends from your portfolio. This makes your AGI $150K next year.

And in that case, that same $10K contribution provides a deduction of $9,250.

Does that mean we should therefore push charitable deductions into lower income years, the inverse of how tax planning around charitable deductions is typically done? Not necessarily – because the value of a deduction is directly proportional to the tax bracket you are in when you get the deduction.

A married couple with $1M of AGI is in the 37% marginal tax bracket, whereas that same couple with $150K of AGI faces a top marginal rate of just 22%.

So, the 1st takeaway here is that you shouldn’t simply push your deductions to a lower AGI year in order get more of the deduction above the AGI 0.5% floor.

The 2nd takeaway is that this new tax law will make Donor Advised Funds (DAFs) even more popular than they already are.

In my recent article called 5 Ways to Reduce Capital Gains Taxes after the sale of a Primary Residence, we covered DAFs in more detail than I will today. But the theme there, which also applies here, is the power of “bunching deductions” –

The most significant benefit of a DAF is the ability to "bunch" several years’ worth of charitable contributions into a single tax year. If your total itemized deductions are normally just below the standard deduction threshold, you can contribute three to five years of intended giving into a DAF all at once. This pushes you well above the threshold for 2026, creating a substantial deduction today, while allowing you to distribute those funds to your favorite charities gradually over the coming years.

Going back to our scenario where a taxpayer has $1M of AGI this year and $150K of AGI next year, let’s assume that he plans to give $10K a year to his favorite charitable organizations. They also assume they have $250K worth of the S&P 500, with a very low cost basis.

From a financial and tax planning perspective, they decide to move $100K worth of their S&P 500 shares into a Donor Advised Fund this year. Of the $100K, $95K will be deductible on their Schedule A of their tax return, at 35%. (Remember, going back to item #2 above – deductions are capped at a 35% benefit, even though their marginal rate is 37%).

This saves them over $33,000 in taxes. They then turn around and use some of the $1M they received this year to buy $100,000 of the S&P 500, but now with a higher cost basis. So, they’ve saved on both income taxes and capital gains taxes.

Perhaps most satisfying of all is that they’ve now earmarked funds that can be used for the next 10+ years to make grants to their favorite charities. I say 10+ because the $100K that goes into their DAF can be invested and grow over time, allowing one to donate even more to charity.

High income families and high net worth investors often have questions that exist in the nexus of financial planning, tax planning, estate planning and charitable planning. This is where Wealth Managers shine.

If you or someone you love is seeking this kind of advice around wealth and complexity, please send me an email at rob@swrpteam.com.

Finally, our specialty is helping successful families navigate wealth and all the complexity that comes with it. We want to continue to write about the topics that are most important and interesting to readers like you – so if you have questions or blog article ideas, please reach out to us and let us know - rob@swrpteam.com

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