By Jessica I. Marschall, CPA

President & CEO, MAS LLC

December 2025

Executive Summary

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduces fundamental changes to charitable contribution deductions effective January 1, 2026. These provisions create a complex interplay of new limitations, permanent extensions, and strategic planning opportunities that practitioners must fully understand to serve their clients effectively. This article provides a comprehensive technical analysis of the new charitable deduction framework, the interaction between the enhanced SALT deduction cap beginning in 2025 and charitable giving strategies, and actionable planning considerations for high-income taxpayers.

I. The New 0.5% AGI Floor on Charitable Contributions

A. Statutory Framework

Beginning with tax years after December 31, 2025, the OBBBA imposes a new floor on itemized charitable contribution deductions. Under Internal Revenue Code Section 170(b)(1)(I), as amended, individual taxpayers who itemize deductions may only claim a charitable deduction to the extent that their aggregate contributions exceed 0.5% of their adjusted gross income (AGI). This floor applies to all categories of charitable contributions and is calculated before the application of existing percentage-of-AGI limitations.

The statutory language specifies that the floor is based on the taxpayer’s “contribution base,” defined as AGI computed without regard to any net operating loss carryback for the taxable year. This is a critical distinction for taxpayers who may have NOL carrybacks that would otherwise reduce their AGI.

B. Practical Application

To illustrate the impact of the 0.5% floor, consider a married couple filing jointly with an AGI of $500,000 who contributes $20,000 in cash to qualified public charities. Under the new rules:

1. The 0.5% floor equals $2,500 ($500,000 × 0.005)
2. Deductible charitable contributions are limited to $17,500 ($20,000 − $2,500)
3. The first $2,500 of contributions provides no tax benefit whatsoever

For higher-income taxpayers, this floor becomes increasingly significant. A taxpayer with $2,000,000 in AGI faces a $10,000 floor, meaning contributions up to that amount generate zero deduction. For ultra-high-net-worth individuals with AGIs of $10,000,000 or more, the floor reaches $50,000—a substantial reduction in the tax benefit of charitable giving.

C. Ordering Rules and Interaction with Existing Limitations

The 0.5% floor is applied in a specific order, starting with contributions subject to the lowest AGI percentage limitations. Under IRC §170(b)(1)(I), the floor is applied to contributions in the following sequence:

1. Capital gain property contributions to private foundations (20% limit)
2. Capital gain property contributions to public charities (30% limit)
3. Other contributions to private foundations (30% limit)
4. Contributions of qualified conservation easements
5. Other non-cash contributions to public charities (50% limit)
6. Cash contributions to public charities (60% limit)

This ordering sequence means that the floor first reduces deductions for property donations before affecting cash contributions. After the floor is applied, the 2/37 limitation on itemized deductions for top-bracket taxpayers (discussed in Section II) applies as a final reduction.

II. The 35% Limitation on Top-Bracket Itemized Deductions

A. The 2/37 Rule Explained

For tax years beginning after December 31, 2025, the OBBBA introduces a new limitation that effectively caps the tax benefit of all itemized deductions—including charitable contributions—at 35% for taxpayers in the 37% marginal tax bracket. This provision replaces the pre-TCJA “Pease limitation,” which was eliminated by the Tax Cuts and Jobs Act of 2017.

Under the new rule, otherwise allowable itemized deductions are reduced by 2/37 of the lesser of:

• The taxpayer’s total itemized deductions, or
• The amount by which the taxpayer’s taxable income (computed before itemized deductions are considered, but increased by the amount of itemized deductions) exceeds the threshold for the 37% tax bracket

For 2026, the 37% bracket begins at taxable income of $640,600 for single filers, $768,700 for married couples filing jointly, and $384,350 for married individuals filing separately.

B. Mathematical Application

Example 1: A married couple filing jointly has $100,000 in otherwise allowable itemized deductions in 2026. Before considering those deductions, their taxable income exceeds the 37% bracket threshold by $1,000,000.

• The limitation applies to the lesser amount: $100,000 (itemized deductions)
• Reduction: 2/37 × $100,000 = $5,405.41
• Allowable itemized deductions: $100,000 − $5,405.41 = $94,594.59
• Tax benefit: 37% × $94,594.59 = $35,000 (exactly 35% of the original $100,000)

This formula ensures that the effective tax benefit of itemized deductions for top-bracket taxpayers is capped at 35 cents per dollar rather than 37 cents per dollar.

C. Combined Impact: Floor Plus 2/37 Limitation

The interaction between the 0.5% AGI floor and the 2/37 limitation creates a “double whammy” for charitable donors in the top bracket. Consider the following comprehensive example:

Example 2: Anna and Ben (married filing jointly) have a combined AGI of $1,100,000 in 2026. They make the following charitable contributions: $350,000 cash to their private foundation and $50,000 cash to public charities. Assume their only itemized deduction is the charitable deduction.

Step 1 – Apply AGI Limitations:

• Private foundation contribution: Limited to 30% of AGI = $330,000 ($1,100,000 × 0.30)
• Public charity contribution: $50,000 is fully deductible (under 60% limit)

Step 2 – Apply 0.5% Floor:

• Floor amount: $1,100,000 × 0.005 = $5,500
• The $5,500 floor is applied first to the private foundation contribution: $330,000 − $5,500 = $324,500

Step 3 – Apply 2/37 Limitation:

• Total itemized deductions after floor: $324,500 + $50,000 = $374,500
• Reduction: 2/37 × $374,500 = $20,243
• Final allowable deduction: $374,500 − $20,243 = $354,257

Result: From $400,000 in total charitable payments, Anna and Ben can only deduct $354,257—a reduction of $45,743 from what would have been allowed under pre-OBBBA rules.

D. The Three-Year Recapture Rule

Under IRC §170(e)(7), if a charity disposes of tangible personal property within three years of receiving it, and the donor claimed a FMV deduction based on related use, the donor may be required to recapture the excess of FMV over basis as ordinary income. This recapture applies if:

• The donor claimed a deduction greater than basis (i.e., claimed FMV based on related use)
• The donee organization disposes of the property within three years
• The organization fails to certify in writing that the property was used for exempt purposes or became impossible to use for such purposes

Practice Tip: Always obtain a signed written statement from the charitable organization confirming its intent to use the tangible personal property for its exempt purpose. This documentation is essential both for substantiation and for protection against potential recapture.

Documentation Requirements: Qualified appraisals are mandatory for non-cash contributions exceeding $5,000. The appraisal must be conducted by a qualified appraiser no earlier than 60 days before the contribution and no later than the due date of the return on which the deduction is claimed. Form 8283 (Noncash Charitable Contributions) must be completed and attached to the return.

IV. Carryforward Rules Under the New Regime

A. Treatment of Excess Contributions

Under IRC §170(d)(1)(C), as amended, contributions disallowed by either the percentage-of-AGI limitations or the 0.5% floor may be carried forward for up to five subsequent taxable years (fifteen years for qualified conservation contributions). However, critical distinctions apply:

• Carryforwards from pre-2026 contributions: Not subject to the 0.5% floor when used in 2026 or later years
• Carryforwards from 2026+ contributions: Subject to the 0.5% floor in each year the carryforward is utilized
• Floor amounts not otherwise deductible: Added back to the carryforward amount

B. Example of Carryforward Application

A donor with $500,000 AGI contributes $400,000 cash to a public charity in 2026. The 60% limitation allows a current-year deduction of $300,000. After applying the 0.5% floor ($2,500), the allowable deduction is $297,500. The remaining $102,500 ($100,000 excess plus the $2,500 floor amount) carries forward.

In 2027, assuming the same AGI and no additional contributions, the donor claims the $102,500 carryforward, reduced by a new $2,500 floor, resulting in a $100,000 deduction.

V. The Expanded SALT Deduction: Synergies and Strategic Planning

A. SALT Cap Increase: Effective 2025

The OBBBA increases the state and local tax (SALT) deduction cap from $10,000 to $40,000 for tax years 2025 through 2029. This change is effective immediately for the 2025 tax year—one year before the charitable contribution limitations take effect. Key provisions include:

• Base cap: $40,000 for most filers ($20,000 for married filing separately)
• Annual adjustment: 1% increase annually through 2029
• Income phaseout: The $40,000 cap begins phasing out at MAGI of $500,000, reducing by 30% of excess income until reaching $10,000 at $600,000
• Sunset: Reverts to $10,000 in 2030

B. Interaction with Charitable Deductions

The timing mismatch—SALT relief in 2025, charitable restrictions in 2026—creates a unique planning opportunity. The expanded SALT deduction may push more taxpayers into itemization territory, thereby making charitable deductions more valuable. Consider:

Example: A married couple in a high-tax state with $35,000 in SALT payments and $8,000 in charitable contributions previously claimed the standard deduction ($30,000 in 2024). Under OBBBA:

• 2025: SALT deduction of $35,000 + charitable deduction of $8,000 = $43,000 total itemized deductions versus $31,500 standard deduction. Itemizing saves taxes.
• 2026: Same deductions, but now the 0.5% floor applies. With $300,000 AGI, the floor is $1,500. Net charitable deduction: $6,500. Total itemized: $41,500.

C. Strategic Considerations

Bunching Strategies: The expanded SALT deduction in 2025 combined with no charitable floor creates optimal conditions for accelerated giving. Taxpayers should consider:

• Contributing multiple years’ planned giving to a donor-advised fund (DAF) in 2025
• Making large appreciated property gifts (including art and collectibles to related-use charities) in 2025 to capture full 37% bracket benefit
• Timing property tax prepayments in 2025 to maximize the $40,000 SALT cap

MAGI Management: Taxpayers near the $500,000 SALT phaseout threshold should evaluate income timing strategies, including deferring Roth conversions, accelerating capital losses, and maximizing retirement plan contributions.

VI. The Universal Charitable Deduction for Non-Itemizers

Beginning in 2026, the OBBBA reinstates an above-the-line deduction for cash charitable contributions by non-itemizers, subject to the following limitations:

• Maximum deduction: $1,000 for single filers, $2,000 for married filing jointly
• Eligible contributions: Cash donations to operating 501(c)(3) public charities only
• Exclusions: Contributions to donor-advised funds, private foundations, and supporting organizations do not qualify
• Important: This deduction is not subject to the 0.5% AGI floor

This provision expands access to charitable tax benefits for the approximately 90% of taxpayers who claim the standard deduction, though the modest limits provide relatively minor incentives compared to itemizer benefits.

VII. Qualified Charitable Distributions: An Unaffected Strategy

Qualified charitable distributions (QCDs) from individual retirement accounts remain a powerful planning tool unaffected by the OBBBA changes. For taxpayers age 70½ or older:

• QCDs of up to $108,000 per person in 2025 (indexed annually) may be made directly from an IRA to a qualified charity
• Amounts distributed as QCDs are excluded from gross income entirely
• QCDs count toward required minimum distributions (RMDs)
• The 0.5% floor, 2/37 limitation, and itemization requirements are completely bypassed

For donors over 70½ who would otherwise be subject to the new limitations, QCDs offer superior tax efficiency and should be maximized before considering other giving methods.

VIII. Planning Recommendations

A. Year-End 2025 Strategies

1. Accelerate charitable contributions: 2025 is the last year without the 0.5% floor. Bunching multiple years’ giving into 2025 maximizes tax benefits.
2. Fund donor-advised funds: DAF contributions made in 2025 receive full deduction treatment; grants can be distributed over future years.
3. Donate appreciated property: Contributions of appreciated securities, art, and collectibles in 2025 capture full fair market value deduction and 37% bracket benefit before the 2/37 limitation applies. For art and collectibles, ensure donations are to related-use organizations.
4. Prepay 2026 property taxes: Capture the enhanced $40,000 SALT cap while coupling with maximized charitable deductions.
5. Evaluate carryforward strategy: Pre-2026 carryforwards are not subject to the new floor—strategically generate these in 2025.

B. Ongoing 2026+ Strategies

• Maximize QCDs: For donors 70½+, prioritize QCDs to bypass all new limitations
• Gift bunching cycles: Alternate between itemizing years (with large bundled gifts) and standard deduction years to minimize the floor’s impact
• AGI management: Reduce AGI through retirement contributions, HSA contributions, and capital loss harvesting to lower both the 0.5% floor and SALT phaseout exposure
• Charitable remainder trusts: Consider CRTs for clients who desire income streams while obtaining current charitable deductions

IX. Conclusion

The One Big Beautiful Bill Act fundamentally reshapes the charitable contribution landscape for itemizing taxpayers. The new 0.5% AGI floor, combined with the 2/37 limitation on top-bracket itemized deductions, significantly reduces the tax benefit of charitable giving for high-income donors beginning in 2026. However, the enhanced SALT deduction effective in 2025 provides a unique one-year window for aggressive year-end planning.

Practitioners should proactively engage clients in year-end 2025 planning to accelerate charitable giving before the new limitations take effect. The interaction between the permanent extension of AGI limits (60%, 50%, 30%, and 20%), the new floor, the 2/37 cap, and the temporarily enhanced SALT deduction creates both complexity and opportunity. Strategic timing, vehicle selection (DAFs, QCDs, direct gifts), and income management will be essential tools for maximizing the tax efficiency of philanthropic intent.

As always, individual circumstances vary, and taxpayers should consult with qualified tax professionals before implementing any strategies discussed herein.

About the Author

Jessica I. Marschall, CPA, is the President and CEO of MAS LLC, a tax advisory firm based in Fredericksburg, Virginia. With over 26 years of experience in public accounting, Ms. Marschall specializes in complex tax planning, charitable contribution strategies, and IRS-qualified appraisals. She also serves as President of The Green Mission Inc., Probity Appraisal Group, and GM-ESG, providing comprehensive services in deconstruction appraisals, art and antiques valuation, and ESG consulting.

Disclaimer: This article is provided for informational purposes only and does not constitute legal or tax advice. The information contained herein is based on current interpretations of the One Big Beautiful Bill Act and may be subject to change as regulatory guidance is issued. Readers should consult with their own tax advisors regarding their specific circumstances.