What's Happening?
Significant changes to charitable tax deductions are set to take effect in 2026 as part of President Trump's tax and spending package. These changes will affect both itemizers and non-itemizers differently. For itemizers, two major changes include a 0.5%
adjusted gross income (AGI) floor, meaning only charitable contributions exceeding 0.5% of a taxpayer's AGI are deductible, and a 35% cap on deduction value for those in the top 37% tax bracket. This means a top earner donating $10,000 will receive a $3,500 tax reduction instead of the $3,700 they would have received under the current rate. Non-itemizers, who make up about 90% of filers, will be able to claim a deduction for cash donations up to $1,000 for single filers and $2,000 for couples filing jointly, starting next year.
Why It's Important?
These changes are significant as they will influence how and when taxpayers choose to make charitable donations. For itemizers, the new rules may encourage them to accelerate their giving before the changes take effect to maximize their deductions. High-net-worth individuals might consider strategies like bunching donations or using donor-advised funds to optimize their tax benefits. For non-itemizers, the introduction of a deduction for cash donations could incentivize more charitable giving, potentially boosting donations to charities. The changes could have a substantial impact on the financial planning strategies of individuals and the funding of charitable organizations.
What's Next?
As the changes are set to take effect in 2026, taxpayers and financial advisors will need to adjust their strategies accordingly. Itemizers may choose to increase their donations in 2025 to avoid the new AGI floor and deduction cap. Non-itemizers might delay their donations until 2026 to take advantage of the new deduction. Charitable organizations may also need to adjust their fundraising strategies to align with the new tax incentives. The broader impact on charitable giving trends will become clearer as these changes are implemented.
