Charitable Planning Under OBBBA: Key Considerations for Advisors and Donors in 2025
On July 4, 2025, the One, Big, Beautiful Bill Act was signed into law, also known as OBBBA, HR1, PL 119-21, or OB3. Most notably, OBBBA extends most of the provisions from the Tax Cuts & Jobs Act of 2017 (TCJA), which were to expire on December 31, 2025. With the passage of the OBBBA, we now have certainty about the future tax rates and brackets, increased estate tax exemption, and increased state & local income tax deduction up to $40,000. This means most individual taxpayers will not see substantial tax increases and might even see tax cuts in 2025.
The top ordinary tax rates stay at 37% for ordinary income and 20% for long-term capital gains and qualified dividends. There is still the zero percent capital gains rate for married couples with taxable income of less than $96,700.
The standard deduction got an increase for 2025 and there is a new enhanced senior deduction of $6,000 for anyone age 65 or older. However, in order to claim this entire amount, the adjusted gross income for couples filing jointly must be less than $150,000 and for unmarried, under $75,000.
Starting in 2026, for those who itemize, charitable contributions will be subject to a .5% floor based upon Adjusted Gross Income (AGI). This means only the portion of donations in excess of .5% of AGI will be deductible.
Here is an example on how this works: Let’s assume AGI is $200,000. $10,000 is donated to qualified charities. The deduction is reduced by .5% of $200,000 = $1,000. Therefore, of the $10,000 donation, only $9,000 is allowed as a charitable deduction.
Also starting in 2026, for nonitemizers, there will be a partial charitable contribution deduction. Unmarried taxpayers can claim up to $1,000 and married taxpayers can claim up to $2,000 as a charitable deduction on top of their standard deductions. The donations have to be in cash and the standard charitable deduction substantiation rules apply.
What does this mean for charitable planning for your clients?
Consider front-loading charitable gifts before the new limitations kick in. This means taking advantage of donor advised funds. For those who qualify, the qualified charitable distribution (QCD) is a great way to bypass the new limitation along with other benefits.
Donor Advised Funds (DAF)
Transferring appreciated securities to a DAF is a great way to get the deduction for the value of the securities now and donate to charities later. The stock market is at a record high so there should unrealized gains on stocks, mutual funds, and ETFs. Transferring appreciated securities from a brokerage account to a donor advised fund will also avoid capital gains on the unrealized gains. Donations to specific charities from the DAF can be made later.
Make sure enough appreciated securities are transferred to be able to itemize. In other words, transfer more than the amount of the standard deduction to take advantage of itemizing. This strategy is also known as “lumping” deductions. Do this in 2025 to avoid the limitation starting in 2026.
Qualified Charitable Distributions (QCD)
Anyone over the age of 70 ½ should consider making all their charitable contributions out of their IRA. Why? Most Americans take the standard deduction and do not itemize. This means their charitable contributions make no difference on their tax returns because they are not itemizing.
However, making charitable contributions out of an IRA has the following benefits:
- The QCD fulfills the Required Minimum Distribution (QCD). For example, your client’s RMD is $20,000. They do not need it and plan to give that much away to charity anyway. By giving the $20,000 to charity out of the IRA, this will fulfill the RMD requirement, which means the $20,000 is not included in taxable income. This is equivalent to a 100% deduction of $20,000.
- Since the QCD is not included in income, this may help reduce the Medicare premium surcharges and other AGI/taxable income considerations such as capital gains tax rates.
- There is a new Code Y for QCDs on the Form 1099R.
- There is a new check box on Line 4c of Form 1040 for QCD.
- The 2025 maximum QCD is $108,000. There is also a once-in-a-lifetime QCD rollover of up to $54,000 for 2025 into a Charitable Gift Annuity (CGA). More on that next.
Charitable Gift Annuity (CGA)
A great charitable giving and planned giving tool to consider is a CGA. You can donate cash or appreciated securities to establish a CGA. In return, you get a tax deduction for the present value of the gift and income for the rest of your life and a beneficiary such as a spouse. A portion of the income will be tax-free and the rest would be ordinary income. If appreciated securities were donated, a portion of that income will also be capital gains – which would be taxable at the favorable 0%, 15%, or 20% capital gains rates. The payout is generally better than a commercial annuity, but the main difference is the charity will get the remainder of the annuity upon the last beneficiary’s death.
If the CGA is funded by an IRA QCD, the entire distribution is ordinary income.
Many times, the CGA will be advantageous over a charitable remainder trust because it is less expensive to set up and easier to administer. No separate tax return is required and the donor gets a 1099R from the CGA to report the income on the tax return. However, with less complexity means less flexibility such as the term of the CGA cannot be set by a term of years, but the donor’s (and survivor’s) life expectancy.
Charitable giving is certainly a way to reduce your clients’ tax bills. There is some urgency in 2025 since starting in 2026, the benefit of the deduction will be limited.
Your charitable planning experts at the American Heart Association will be helpful to analyze the various charitable and planning giving opportunities at no cost or obligation.
About the Author
Lawrence Pon, CPA/PFS, CFP, EA, USTCP, AEP
Pon & Associates
Lawrence Pon is a Certified Public Accountant, Personal Financial Planner, Enrolled Agent, United States Tax Court Practitioner, and Accredited Estate Planner in Redwood Shores, CA. He has been in practice since 1986 and speaks regularly nationwide on tax planning and financial planning topics to tax professionals and financial advisors. Lawrence teaches Income Tax at the College of San Mateo. He received his BS in Business Administration with emphasis in Accounting and Finance from the University of California, Berkley and MS in Taxation from Gold Gate University in San Francisco.
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The opinions expressed in this article are solely those of the author and do not reflect the views or endorsements of the American Heart Association. The Association does not endorse or assume responsibility for any information or opinions presented in this article.
