Since the One Big Beautiful Bill Act (OBBBA) became law on July 4th, 2025, much of the attention has been given to provisions that affect most taxpayers, such as the extension of the individual tax brackets, a permanently increased standard deduction and the introduction of the $40,000 SALT cap.
Less focus has been given to two policy changes that will significantly limit the tax advantages of charitable gifts starting in 2026. While charitable giving is generally driven by passion, not income tax breaks, it’s ideal when one’s generosity comes with financial benefits.
Let’s review the two provisions and an example.
The 0.5% Adjusted Gross Income (AGI) Floor
Starting in 2026, the OBBBA introduces a 0.5% AGI floor for itemized deductions related to charitable gifts. Meaning, only the portion of charitable gifts that exceed 0.5% of a taxpayer’s AGI will be deductible as an itemized deduction.
The 2/37 Itemized Deduction Limitation (Modified Pease Limitation)
The OBBBA officially repealed the original Pease Limitation, which had been suspended by the 2017 Tax Cuts and Jobs Act (TCJA). However, starting in 2026, the law introduces a new cap on itemized deductions, reducing allowable deductions by 2/37 (approximately 5.4%) of the lesser of:
- total itemized deductions
- the amount by which total income (minus above the line deductions) exceeds the 37% federal tax bracket threshold
Example: Robert and Debbie Retiree
Robert and Debbie file a joint tax return and sold their business in 2025 through an asset sale, generating $5,000,000 of ordinary income. This transaction pushes them into the highest tax bracket, creating a substantial tax liability. To help offset their tax burden and support causes they care about, they contribute $200,000 to their Donor Advised Fund (DAF).
Under current law, their charitable gift would reduce taxable income dollar for dollar, saving Robert and Debbie $74,000 in federal tax ($200,000 donation x 37% federal tax bracket).
However, if the transaction took place in 2026 (or later), their charitable gift would be subject to the OBBBA provisions, limiting their tax savings:
0.5% (AGI) Floor
Robert and Debbie’s AGI of $5,000,000 creates a significant threshold before any charitable gifts can be deducted from income:
$5,000,000 x 0.5% = $25,000
This means the first $25,000 of their charitable gift cannot be deductible as an itemized deduction. So, their $200,000 deduction is reduced to:
$200,000 - $25,000 = $175,000
2/37 Itemized Deduction Limitation
The 2/37 Limitation further reduces their deduction. They take the lesser of:
- total itemized deductions: $175,000
- total income above the 37% tax bracket: $4,233,400
$5,000,000 total income - $766,600 (beginning of the 37% federal tax bracket) = $4,233,400
Then multiply by 2/37 (roughly 5.4%):
$175,000 x 5.4% = $9,450
So, their deduction is reduced by an additional $9,450, resulting in a total itemized deduction of $165,550.
In total, $34,450 of their $200,000 charitable gift provides no federal tax benefit, resulting in an additional $12,746 federal tax liability ($34,450 x 37% federal tax bracket).
The Bottom Line
While the OBBBA is expected to deliver meaningful tax savings for many, it introduces policy changes that will limit income tax deductions and increase taxes for philanthropic taxpayers as illustrated above.
If you plan to make substantial charitable gifts in the coming years, we highly suggest “bunching” your donations into a Donor Advised Fund (DAF) before year-end. Doing so enables you to secure a full income tax deduction in 2025 and avoid the limitations that take effect in 2026. Your DAF contributions continue to grow tax-free and can be distributed to charities at any time, according to your timeline.
If you’re philanthropic, a high earner and/or planning to sell your business before year-end, consider consulting your accountant or financial advisor to ensure you’re maximizing the tax benefits of your generosity.