Signed into law on July 4, 2025, the One Big Beautiful Bill Act (OBBBA) introduces sweeping changes to the tax code, including several key updates to charitable contribution deductions beginning in 2026. These changes are designed to encourage philanthropy while reshaping how taxpayers — both itemizers and non-itemizers — approach charitable giving. Whether you’re an active donor, or simply planning ahead, understanding these updates is important for maximizing your charitable tax benefits.
Above-the-line charitable deduction for non-itemizers
For taxpayers who take the standard deduction rather than itemizing, charitable giving has historically offered no tax benefit. A temporary provision during the COVID-19 pandemic allowed a modest above-the-line charitable deduction of $300 for single filers and $600 for joint filers in 2020 and 2021. These donations had to be made in cash and could not go to supporting organizations or donor advised funds (DAFs).
OBBBA permanently reinstates this deduction and increases the cap to $1,000 for single filers and $2,000 for married couples filing jointly. As mentioned, contributions must be in cash and cannot be made directed to supporting organizations or DAFs.
Importantly, this deduction does not reduce your adjusted gross income (AGI), but it is subtracted from AGI to arrive at your taxable income, offering a meaningful benefit in addition to the standard deduction.
New charitable giving itemized tax deduction floor
In a surprise move, the One Big Beautiful Bill introduces a 0.5% floor on charitable deductions, similarly to the longstanding 7.5% floor for medical expenses. This means that only charitable contributions exceeding the 0.5% of your AGI will be deductible.
Example 1: Andrew has AGI of $200,000 and makes total charitable donations of $10,000. His charitable deduction is calculated as:
$10,000 – ($200,000 x 0.005) = $9,000.
This floor applies to aggregate charitable giving, not individual gifts. In other words, you sum all your charitable gifts before applying the 0.5% reduction.
Planning tip: To navigate this new floor, consider consolidating smaller annual gifts into larger, less frequent donations. This strategy can be executed without disrupting cash flow to charities by using a donor advised fund. Learn more about DAFs in our dedicated article.
A DAF allows donors to take a charitable deduction in the year of contribution while distributing funds to charities over time, especially useful in years with higher income.
Qualified charitable distributions under the new bill
Another powerful planning tool is the qualified charitable distribution (QCD). QCDs are available to taxpayers aged 70 ½ or older and involve making a direct distribution from an IRA to a qualified charity. This distribution is tax-free, counts toward your required minimum distribution (RMD), and reduces AGI, a significant advantage over taking a taxable distribution and then donating cash.
While QCDs do not qualify for an itemized deduction (to prevent double-dipping on benefits), they bypass the 0.5% charitable deduction floor, making them a smart strategy for eligible donors.
New limitation on total itemized tax deductions
Though not exclusive to charitable donations, OBBBA introduces a new cap on itemized deductions for taxpayers in the top 37% tax bracket starting in 2026. The limitation reduces allowable itemized deductions by 2/37 of the lesser of:
- The taxpayer’s total itemized deductions, or
- The amount by which taxable income plus itemized deductions exceeds the 37% bracket threshold
Effectively, limits the benefit of itemized deductions to a maximum of 35 cents on the dollar.
Example 2: Amy and Paul have total taxable income of $800,000 before itemized deductions. Their itemized deductions total $45,000, and the 37% bracket begins at $750,000 (assumption for simplicity).
First, determine the lesser of
- Total itemized deductions ($45,000) or
- Taxable income prior to taking itemized deductions less $750,000 ($50,000)
Secondly, reduce $45,000 by 2/37 = $42,568.
We can then see the actual tax benefit of the deductions is $42,568 x 0.37 = $15,750, which is the same amount as the full itemized deduction at the 35% tax bracket: $45,000 x 0.35 = $15,750.
Conclusion: Plan ahead for 2026
The key takeaway? Take advantage of current rules in 2025 before the charitable deduction floor and total itemized deduction limitations take effect! If you’re not expected to itemize, consider delaying cash gifts until next year to benefit from the new above-the-line deduction. If you’re 70 ½ or older, QCDs may be your most tax-efficient option.
As always, strategic charitable planning can make a meaningful difference, not just for your tax return, but for the causes you care about. Charitable giving is an important part of your overall wealth, tax strategy, and estate plan. If you are a Mercer Advisors client and have additional questions regarding OBBBA and your tax strategy, contact your advisor. Not a client, let’s talk.
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All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. Hypothetical examples are for illustrative purposes only. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.
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