For many years, the U.S. tax code has incentivized individuals to give to charitable causes by allowing an itemized deduction for charitable contributions. Although the amount that an individual could deduct was limited to a certain percentage of their Adjusted Gross Income (AGI) based on the type of property contributed and the type of organization it was contributed to, any contribution made within those limits could be deducted dollar-for-dollar to reduce the taxpayer’s taxable income.
However, under the One Big Beautiful Bill Act (OBBBA), passed in 2025, two new rules are set to come into effect for the 2026 tax year that will reduce the tax benefits that individuals receive from making charitable contributions. The first is a new ‘floor’ on charitable deductions that reduces a taxpayer’s charitable deduction by 0.5% of their AGI (and if total contributions don’t exceed 0.5% of AGI, the deduction is reduced to zero). And the second is a reduction of taxpayers’ cumulative itemized deductions by a factor of 2/37ths, which takes effect only for taxpayers whose taxable income (before itemized deductions) exceeds the threshold for the top 37% Federal tax bracket.
The overall effect of the new limitations will be to slightly reduce the tax benefits of giving to charity – but only slightly, given how small the 0.5%-of-AGI floor and 2/37ths reductions are relative to the taxpayer’s total income. However, the limitations will have a more noticeable effect on the ability to deduct charitable contributions for higher-income households, where the 0.5%-of-AGI floor creates a higher hurdle for deducting contributions – to the extent that for donations of smaller sizes, higher-income taxpayers might receive less of a hard-dollar tax benefit than lower-income taxpayers, despite being in a higher bracket! However, the tax benefits of charitable contributions steadily increase in favor of higher-income households for donations of bigger sizes. Which ultimately means that, rather than disincentivizing charitable contributions for higher-income households, OBBBA’s new limitations actually incentivize taxpayers to contribute more as income level increases.
