New OBBBA Charitable Deduction Rules Bring Floors and Limits
With changes in the One Big Beautiful Bill Act ranging from mere extensions of current law to new directions altogether, it’s easy to overlook the somewhere-in-the-middle changes to the income tax deductions for charitable contributions. Here are some of the notable changes made by the OBBBA:
A “New” Above-the-Line
On the low but broadly applicable end, the OBBBA ushers in, for 2026, a “new” above-the-line (that is, non-itemized) charitable deduction, which means it can benefit most taxpayers rather than the comparatively few who benefit from itemized deductions. This is a revival of a popular but temporary pandemic-era deduction, now made permanent at $1,000 per taxpayer or $2,000 for married couples who file jointly. Advisors should note that this deduction generally applies only to cash contributions. Presumably, the taxpayers making substantial non-cash charitable contributions will likely be itemizing deductions anyway. Moreover, contributions to donor-advised funds (DAFs) and supporting organizations under IRC Section 509(a)(3) are ineligible for the deduction.
New Floor, Old Ceilings
The OBBBA creates, for the first time, a floor for an individual taxpayer’s itemized charitable deduction. That is, the itemized deduction for charitable contributions is now available only to the extent the taxpayer’s aggregate qualifying charitable contributions exceed 0.5% of the taxpayer’s contribution base. Note, however, that the ceilings limiting the itemized charitable deduction still apply. For planning purposes, the taxpayer’s adjusted gross income is now more important than ever. Not only must one consider whether the continuing AGI ceilings would partially disallow large contributions, but also whether smaller contributions would be deductible at all. Advance planning will be crucial, particularly for taxpayers whose AGI fluctuates from year to year. Importantly, deductions disallowed because of the 0.5% floor aren’t eligible to be carried forward to subsequent tax years unless there’s another charitable deduction disallowance (that is, disallowed because of a ceiling) to which the disallowed amount under the 0.5% floor can attach.
As a bonus, Section 170(b)(1)(I) also contains new ordering rules for applying the varying AGI limits based on the type of contribution and the organization. The general order for calculating the deduction begins with contributions of capital gains property to private nonoperating foundations (20% ceiling), followed by each successive AGI ceiling limit; namely, capital gains property contributions to public charities (30% ceiling), other contributions to private foundations (30% ceiling), contributions of qualified conservation easements (50% ceiling, or 100% ceiling for a qualified rancher or farmer), non-cash contributions to public charities (50% ceiling) and ending with cash contributions to public charities, which are subject to the highest 60% AGI ceiling. Thus, it will be more difficult for taxpayers to exceed the 0.5% floor when their contributions are concentrated at lower AGI thresholds, such as those who have primarily contributed appreciated property to private non-operating foundations. The benefit, however, is that the floor absorbs the least-favored contribution types first.
Finally, the OBBBA made permanent the fleeting Tax Cuts and Jobs Act of 2017, 60% (rather than 50%) ceiling for cash contributions.
Corporations Now Subject to a Floor
A corporation’s charitable contribution deduction is now also subject to a floor. For a corporation, the charitable deduction is allowed only to the extent the corporation’s aggregate qualifying contributions exceed 1% of its taxable income. Corporations are also subject to another innovation, disallowing contributions that exceed 10% of taxable income. It’s possible that some charitable contributions could be characterized as ordinary business expenses to avoid the charitable deduction limitations. Because flow-through entities, such as S corporations and partnerships, are taxed at the individual level and thus subject to the individual contribution limits, it may also be worthwhile to consider whether charitable contributions for those entities may be characterized as business expenses.
A New Cutback for Itemized Deductions
The good news for individuals is that a new 2/37 (5.4%) cutback for itemized deductions (including the charitable deduction, except for the above-the-line deduction) only applies to individuals in the highest 37% marginal tax bracket. The bad news is that individual taxpayers opting to itemize deductions are much more likely to be in the 37% bracket than non-itemizers. For itemizing individuals in the 37% bracket, there are now three limits to consider with respect to charitable contributions: (1) varying AGI ceilings based on the type of property contributed and the type of organization, applied using new ordering rules; (2) a 0.5% AGI floor to qualify for an itemized charitable deduction, with new carry forward considerations; and (3) an aggregate “haircut” of 2/37 of total itemized deductions (including the charitable deduction). More precisely, the 2/37 reduction applies to the lesser of: (1) total itemized deductions, or (2) marginal taxable income exceeding the lower income limit of the 37% bracket with respect to the taxpayer.
Unlike the 0.5% floor, the 2/37 reduction also applies to trusts, which reach the highest 37% tax bracket at a much lower income level than individuals ($16,000 for 2026). It’s possible that this limitation wasn’t intended to apply to trust deductions. Until there’s a statutory or regulatory fix, however, deductions for a trust’s charitable contributions will be reduced by 2/37.
*This article is an abbreviated summary of “How Changes in Charitable Deduction Rules Affect UHNW Clients,” which appears in the July/August 2026 issue of Trusts & Estates.
