Let’s Talk About Tax

The One Big Beautiful Bill Act (OBBBA) has enacted many fundamental tax policy changes. One of those changes that may be flying under the radar is the change in itemized charitable deductions. Starting in 2026, OBBBA introduces significant changes to charitable deduction rules for both individuals and estates and trusts, thus adding complexity for taxpayers and advisors.

The Big Three Changes

OBBBA introduces three new rules with respect to taking itemized deductions for charitable contributions:

1. The 2/37ths Disallowance Rule: Applying to ALL Itemized Deductions

All itemized deductions are going to be trimmed by 2/37ths of the lesser of (a) a taxpayer’s itemized deductions and (b) the amount that a taxpayer’s taxable income exceeds the 37% bracket threshold. Itemized charitable deductions will also be caught by this deduction haircut. In practice, high-income, charitably minded donors will be most impacted and receive slightly smaller tax benefits for their contributions. For example, a $100,000 gift by a high-income earner will result in a tax benefit of only $35,000 instead of $37,000 (in 2025 and prior to OBBBA).

2. Estates and Trusts Subject to Disallowance

Previously, estates and trusts were exempt from limitations on itemized deductions. Not anymore under OBBBA. Estates and trusts are also subject to the 2/37ths disallowance rule described above. For trusts and estates whose assets are entirely distributable to charity, determining the deductible amount will become more challenging than ever, and trustees and/or personal representatives will now have to set aside liquidity to pay tax on the disallowed portion.

3. The 0.5% Floor for Individuals

Starting in 2026, individual taxpayers who itemize will only be allowed to take a charitable deduction to the extent their contributions exceed 0.5% of their adjusted gross income (AGI). This 0.5% floor now trims qualifying charitable contributions by 0.5%, which in effect decreases the permissible charitable deduction. Taxpayers may carry forward the disallowed charitable contributions to future tax years over a five-year period but subject to the same 0.5% floor applicable to permissible charitable deductions in those future years.

This 0.5% haircut is specific to the charitable deduction and considered before applying the 2/37ths disallowance rule for all itemized deductions. As a result, itemized charitable deductions under OBBBA are hit with a double whammy in value.

To make matters more complicated, individual taxpayers still need to account for AGI limitations for charitable contributions, which have now been made permanent under OBBBA (20% for appreciated property to nonpublic charities; 30% for cash to nonpublic charities; and 60% cash to public charities).

The following example illustrates the application (and considerable juggling) of the 0.5% floor, the 2/37ths disallowance rule and AGI limitations under OBBBA:

Anna and Ben (AB) are a married couple filing jointly in 2026 with a combined AGI of $1.1 million. AB make $400,000 in charitable contributions as follows: (1) $350,000 cash to AB’s private foundation and (2) $50,000 to public charities [Assume: AB’s only itemized deduction will be the charitable deduction.]

First, the unchanged AGI limitations on charitable contributions are applied. For the gift to the private foundation, only $330,000 of the $350,000 is deductible (30% of $1.1 million). For the gift to charities, the full amount is deductible ($50,000 < 60% of $1.1 million).

Second, the 0.5% AGI floor is applied to one or more contributions. Here, the floor equals $5,500. The $330,000 deductible amount to AB’s private foundation must be reduced first by $5,500. Therefore, the total allowable charitable deduction thus far is $374,500 ($324,500 + $50,000).

Third, the 2/37ths disallowance rule is applied. Here, the charitable deduction will be reduced by 2/37ths of AB’s income that exceeds the 37% tax bracket income threshold (2/37ths of $331,299 or $17,908; assuming $768,701 for 37% tax bracket threshold in 2026).

In sum, AB can only take a $356,592 itemized charitable deduction in the 2026 tax year for their total payments to charities made that year (i.e., $400,000): AGI limitation (allowing $330,000 + $50,000), less 0.5% floor ($5,500) less 2/37ths limitation ($17,908). This permitted 2026 year compares to $380,000 before OBBBA.

Why Does This Matter?

For high-income taxpayers and fiduciaries, these changes mean more complexity and less bang for their charitable buck. Charitable giving strategies will need to adapt — especially for trusts and estates that previously enjoyed full itemized deductions. For charitable organizations, this constraint on charitable deductions compounds the ongoing pressure on these organizations to raise funds while facing decreases in individual giving and other governmental grant reductions.

Taxpayers considering significant charitable contributions may wish to act before December 31, 2025, to take advantage of pre-OBBBA rules.