Can you still deduct charitable donations from your taxes? A new 0.5% income threshold adds a wrinkle.
- A recent change in the tax code means that if you choose to itemize, you can no longer deduct charitable donations below 0.5% of your adjusted gross income.
- To maximize your tax savings, consider strategies like charitable bunching, qualified charitable distributions, donor-advised funds and making stock donations.
- Keep up an ongoing conversation with your tax advisor to help ensure your strategy adapts to changing rules and your family’s needs.
If your tax strategy includes making annual charitable contributions to reduce your taxable income, you should know that the rules have changed. You can still plan to itemize your deductions in 2026, but as a result of the One Big Beautiful Bill Act (OBBB), you will now need to exceed a certain dollar threshold before your giving becomes deductible.
This means that you run the risk of paying more in taxes if you don’t adjust your tax strategy to compensate. Keep reading to learn more.
How much of a charitable donation is tax-deductible?
As always, taxpayers can choose to itemize and deduct charitable deductions. However, starting in 2026, they must now donate 0.5% of their adjusted gross income (AGI) before any additional donations become deductible.
- If you earn $1 million in income this year, the first $5,000 you give to charity is not deductible, but you can deduct additional donations after crossing that threshold.
- In an additional wrinkle, if you are in the top 37% tax bracket, as many individuals who itemize charitable contributions are, you should be aware that the tax benefit of your deductions is reduced, essentially capping the benefit as if you were in the 35% tax bracket.
These shifts can potentially make more of your income taxable. However, by adjusting your tax strategy now, you can avoid taking a hit.
How can you maximize your tax deduction for charitable donations?
Taxpayers who itemize on their taxes can choose from several strategies to leverage their charitable giving for maximum tax benefit and optimize their tax savings under the new donation threshold rules. These include charitable bunching, qualified charitable distributions, giving to donor-advised funds and donating stock rather than cash.
Charitable bunching
Charitable bunching means making several years’ worth of charitable donations at once to ensure your giving exceeds the 0.5% AGI floor and therefore qualifies for a tax deduction. For example, you might choose to donate $50,000 to charity in one year rather than $25,000 a year for two years, and then claim the standard deduction for the year where you don’t make any charitable contributions.
Qualified charitable distributions
If you are age 70 1/2 or older and have an IRA, you must take an annual required minimum distribution (RMD), which counts as taxable income. However, you can opt to distribute up to $105,000 directly from your IRA to a qualified charity. This qualified charitable distribution (QCD) amount is non-taxable and can reduce or entirely eliminate your tax exposure from your RMD.
Donor-advised funds
A donor-advised fund (DAF) is a simpler, more flexible alternative to opening your own private foundation. A DAF allows you to open a giving account at a brokerage firm and then make contributions to the account that are immediately tax-deductible.
Those contributions can be invested or grown before being distributed as charitable grants, with the donor advising on how those grants should be distributed. DAFs can be set up in less than a day and have much lower operating costs than private foundations do, making them an excellent alternative option for many donors.
Donating stock rather than cash
Finally, stock donations can often offer significant tax benefits over giving cash. This is because a stock donation is valued based on the price of the stock when it is donated.
For example, let’s say you purchased $100,000 worth of Nvidia stock at $18 a share. Today, with the stock price at close to $180 a share, you could donate those shares to a charity or a donor-advised fund and claim a tax deduction of roughly $1 million.
Donating the stock would also allow you to avoid the $200,000 capital gains liability you would face if you sold the stock and gave the cash to charity. By donating stock, the charity gains $1 million in assets rather than $800,000 in cash and you receive a larger tax deduction.
What are your next steps here?
Both your goals and the tax code are continuing to evolve. So don’t assume that your usual tax strategy is still serving your needs. Instead, protect your legacy by making tax strategy an ongoing conversation.
Talk with your tax advisor about how you can limit your exposure and maximize your upside in light of recent changes to tax law like the new charitable giving income threshold. Your advisor will assess your current approach and may recommend tactics like charitable bunching or giving to donor-advised funds to reduce your potential liabilities.
How Wipfli can help
We advise individuals and families developing a tax strategy that protects their legacies. Let’s talk about your goals and how we can help you achieve them. Start a conversation.
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