Charitable Planning After The Big Beautiful Bill (OBBBA) Is Different

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The One Big Beautiful Bill Act (OBBBA) is now law. One of the myriads of tax benefits it has changed is charitable deductions. There are a number of prominent changes to charitable tax deduction rules, but the bigger story is how OBBBA overall will change charitable planning for some taxpayers. Perhaps the most important take-away is that charitable planning post-OBBBA will be quite different for taxpayers with different circumstances. This variation in the planning spectrum may in fact be greater than it has ever been. What does that mean? Be careful applying charitable planning recommendations from AI or your Canasta or pickleball partners. Planning may really be different for each of you.

Why Is Charitable Giving and Charitable Planning So Important?

OBBBA may, by some estimates, decrease funding for the National Cancer Institute by $2.7 billion, or 37.2%. According to the American Cancer Society, cancer is expected to kill more than 618,000 Americans this year. Cuts to cancer research funding could significantly impact the ability to reduce deaths and suffering from cancer. If American generosity can fill some of that gap, that could be vitally important. And this is only one example.

Do Tax Benefits Motivate Charitable Contributions?

A key question for tax planning for charitable giving is whether reductions of tax deductions for donations will affect the dollars donated. We as a society need to encourage donations to support vital causes that are at the foundation of who we are as Americans.

No doubt personal benefits, such as helping others, supporting important causes, etc., all motivate charitable giving. But tax benefits seem to be an important catalyst of many gifts, especially larger planned gifts. Further, tax benefits may motivate donors to give more. Consider the following: “TCJA increased the standard deduction from $6,500 to $12,000 for individual filers, from $13,000 to $24,000 for joint returns, and from $9,550 to $18,000 for heads of households. As a result, fewer taxpayers will claim a deduction for charitable deduction and the tax savings for each dollar donated will be reduced. All this to say that altruism and trust motivations don’t impact givers who donate less because of recent tax law changes; instead, receiving tax benefits may be one of the primary motivations why these individuals donate.” Abby Rolland, ”Why do people give?” https://blog.philanthropy.indianapolis.iu.edu/2019/11/20/why-do-people-give/, November 20, 2019. This report estimated that the 2017 Tax Act may have reduced donations by $19.1 billion per year.

Charitable Planning Action Steps

There are several OBBBA changes to charitable tax benefits which will be discussed below, and there are many nuances to charitable planning post-OBBBA that will be explored. Consider some of the following:

• Review portfolios and assess opportunities for charitable giving strategies, not only donating appreciated assets as in prior years, but for some taxpayers particularly using non-grantor trusts to maximize contribution deductions.
• Consider, similar to past planning, the concept of “bunching” charitable donations from several years into a single year, to maximize charitable contribution tax benefits. For example, instead of donating $20,000/year, consider donating $100,000 every 5 years, and qualifying for a larger contribution deduction from itemizing. Note that the time value of money should be considered as well.
• Consider the new $1,000 per person ($2,000 per couple) above-the-line charitable contribution deduction if you cannot itemize. This benefit can be meaningful to young and lower earning taxpayers.
• Reassess charitable tax planning strategies for clients in light of the new tax law changes, particularly those with significant business deductions.
• Consider private foundations and donor-advised funds (DAF) to maximize charitable contribution deductions in 2025.
• Review existing grantor trusts and evaluate them for potential conversion to non-grantor trusts to optimize charitable giving tax benefits.

Some Wealthy Taxpayers May Not Obtain Any Contribution Deduction

OBBBA includes some incredibly valuable tax benefits for selected taxpayers. Taxpayers who reduce or eliminate their taxable income with some of the enhanced OBBBA benefits may get little or not benefit from planning for charitable gifts. What impact might that have on charitable giving? Might this dampen large donor motivation to give at a time when many charities will have greater need for donor generosity to replace government funding that will be reduced?

Some of these heavy hitter tax breaks may include:

• 1202 Qualified Small Business Stock (QSBS) provides for a 50% gain exclusion for stock held for 3 years, 75% if held for 4 years and 100% if held for 5 years. The per-issuer cumulative exclusion limitation was increased from $10 million to $15 million by OBBBA (and that amount will be inflation adjusted). Also, the “aggregate gross asset” calculation was increased from $50 million to $75 million (also inflation adjusted).
• Section 199A Qualified Business Income (QBI) Deduction provides a 20% exclusion rate and tax bennie was made permanent.
• OBBBA provides for current deduction for domestic research (including software development) expenses (but it maintains 15-year amortization period for foreign expenses) starting in 2025. This creates the possibility of filing amended income tax returns to claim refunds.
• Bonus Depreciation permits the deduction of up to 100% of the cost for property placed in service after January 19, 2025. That is retroactive back to almost the beginning of the year.
• Qualified Opportunity Zones (QOZ) provide a new and potentially valuable tax benefit. OBBBA creates a rolling 10-year QOZ opportunity that starts January 1, 2027.
• Qualified Production Properties is a new valuable tax benefit for those that may qualify. Manufacturers can deduct 100% of the cost of new qualified production property. This includes buildings used in a qualified production activity, such as the manufacturing, production, or refining of a qualified product.

These and many other income tax benefits contained in OBBBA will result in some taxpayers greatly reducing their taxable income, and those reductions may vary over the years. If your marginal tax rate is low, or if you actually pay no tax, you will not realize a tax benefit from making a donation.

Non-Tax Charitable Planning

If there is little income tax benefit to be realized on your charitable gifts (but see below for ideas that may still help), and no estate tax benefits, what role will your professional advisers play in the charitable planning process? Planned gifts, paid out in instalments over time, in part during your life and in part under your estate planning documents still need to be planned. If your gift is large enough you might want to negotiate a donor agreement with the charity to have input and assurance that the charitable gifts you make will in fact be used in the manner you want. Charitable gifts can be used in ways that involve children or other heirs to teach them the value of giving back. That can all be bolstered by proper trust and other estate planning documents. So, even if you do not have complex tax consequences to your charitable giving, there still could be important planning to address.

Charitable Contribution Deductions Before OBBBA – A Quick Overview

Before reviewing the OBBBA tax changes to charitable giving, and some of the planning opportunities post-OBBBA, it may be helpful to start with a general discussion of the income tax benefits from charitable giving before OBBBA. Understanding what the rules were before will provide context for you to better understand the OBBBA changes.

Individual taxpayers can deduct the dollars or value of property donated to or for the use of a qualified US charity under Code Section 170(a). Charitable deductions are limited based on specified percentages of the taxpayer’s income (more specifically, contribution base): 20%, 30%, 50% or 60% depending on the charity involved. There are also limitations based on the character of the assets involved (e.g., a capital gain asset versus an asset that would generate ordinary income if sold). Whether the charitable recipient will use the property or sell it may impact the deduction.

Generally, you cannot claim a charitable contribution deduction unless you itemize your deductions and do not claim the standard deduction. Because of the OBBBA increase of the standard deduction amount, and the limitations on many of the deductions that could otherwise be itemized, most taxpayers do not itemize. Depending on the impact of the new increased SALT deduction some taxpayers who could not itemize before OBBBA may itemize after OBBBA. So, one of the first steps in determining what charitable planning you might consider is whether you will itemize deductions in the years of the donation (or whether bunching deductions to a single year may be one of your strategies).

Above the Line Contribution Deduction

The new higher standard deduction amounts means that most taxpayers will not qualify for an income tax benefit from making donations. However, OBBBA provides for $1,000 ($2,000 married filing jointly) above the line deduction. That is not much tax incentive for many taxpayers to donate, but for lower income or younger taxpayers it may be meaningful. To qualify charities must be made in cash to a charity, other than a donor advised fund or a supporting organization.

Contribution Carry over Rules

OBBBA provides carryover rules for the contribution amounts that you are not entitled deduct because of the percentage caps (20%, 30%, 50%, or 60%) of your income base. The excess amount that was not deductible in the current year can be carried forward and deducted in any of the next five years, subject to the same limitations.

Half Percent Haircut on Donations

For taxpayers who itemize their deductions, OBBBA added a haircut for charitable contributions. They must be reduced by 0.5% of your contribution base. The contribution base is adjusted gross income (AGI) determined without regard to any net operating loss carryback to the taxable year. So, for example, if your contribution base is $500,000, then .5% x $500,000 = $2,500 is not deductible. If you made $10,000 in donations that would have to be reduced by $2,500. This is combined with the 2/37 adjustment below.

It appears that if your contribution deduction is reduced by the .5% limit above you can carryover it and deduct it in future years but only if you otherwise had a carryover deduction from percentage limitations above.

High Limit for Cash Contributions

and the increased 60% contribution limit for cash gifts to qualified charities is permanently extended.

Itemized Deductions Impact Charitable Deduction

Understanding charitable planning requires understanding planning for itemized deductions, which may include your contributions.

“The TCJA eliminated or restricted many itemized deductions for 2018 through 2025. This, together with a higher standard deduction, reduced the number of taxpayers who itemize deductions. In 2017, 31 percent of all individual income tax returns had itemized deductions, compared with just 9 percent in 2020.” Tax Policy Center, “How did the TCJA change the standard deduction and itemized deductions?” https://taxpolicycenter.org/briefing-book/how-did-tcja-change-standard-deduction-and-itemized-deductions. The OBBBA changes, in particular increasing the SALT deduction may result in more taxpayers itemizing deductions, but the overall percentage would seem that it would remain as a percentage of taxpayers quite low. It seems reasonable to conclude that the substantial majority of taxpayers will not itemize and will not qualify for a charitable contribution deduction. OBBBA increased the standard deduction to $31,500 for married filing joint taxpayers. That, however, does not mean that planning is not possible. It is as explained below.

2/37^th Reduction in Itemized Deductions

The amount of your itemized deductions including charitable (after applying limitations on home mortgage interest and miscellaneous itemized deductions) must be reduced by 2⁄37 of the lesser of: (1) the amount of itemized deductions, or (2) so much of the taxable income of the taxpayer for the taxable year (determined without regard to this section and increased by such amount of itemized deductions) as exceeds the dollar amount at which the 37 percent rate bracket under section 1 begins with respect to the taxpayer. For married filing joint taxpayers this is $751,600. So, if your income is less than that amount you would not have a limitation since you have no income above $751,600 so item (2) above would be zero.

If the discussion in the paragraph above sounds a bit dense consider that this language is paraphrased from the actual OBBBA bill. How many members of Congress understood this limitation? Can you understand this well enough to plan to maximize your deductions? The purpose of this provision seems to be to limit the tax benefit you get from contributions and other itemized deductions to 35% not the 37% maximum tax rate.

Non-Grantor Trusts Basic as Background

An important planning tool to help many taxpayers deduct in full their charitable contributions, whether or not they can itemize their deductions, is the use of non-grantor trusts. Moderate wealth taxpayers can use this type of planning as well us ultra-wealthy taxpayers. To understand this type of planning, which may become more common post OBBBA, some basics of non-grantor trusts must be understood.

Non-grantor trusts are trusts that pay their own tax in general terms. This is quite different than grantor trusts where the trust income is reported on the income tax return of the person who is deemed the grantor for the trust, often the person who created the trust. When calculating the income of a non-grantor trust the rules of how you as an individual taxpayer determine your taxable income are used, except as specifically modified by the trust tax rules. Non-grantor trusts can deduct certain distributions made to trust beneficiaries. That is because the beneficiaries receiving the distributions report that income on their personal income tax returns. To the extent that the trust retains income (i.e., it does not distribute it) that income is subject to trust income tax rates. Trusts face compressed income tax rates. Trust income is taxed at the highest 37% tax bracket in 2025; a trust pays the maximum federal income tax rate of 37% on taxable income over $15,650. In dramatic contrast a married couple filing a joint income tax return in 2025 reaches the maximum federal income tax rate of 37% on taxable income over $751,600 . Trust income may also be subject to the net investment income tax of 3.8% (Code Section 1411).

With all these complexities and seeming tax negatives, why use non-grantor trusts? There are, depending on your circumstances, many benefits. If you create a non-grantor trust for your spouse and descendants, the trust can distribute income your spouse does not need to your descendants who may be in a lower tax bracket. Distributions to these beneficiaries carries out trust income to be taxed on their returns (called distributable net income or DNI). The trustee may even poll the beneficiaries each year and determine which are in the lowest overall tax bracket (counting state and federal income taxes) and make distributions to lower your family’s overall income tax burden.

Might the trustee loan funds to the beneficiary in the high tax state, thereby avoiding distributable net income (“DNI”) flowing out to that beneficiary (understanding that the trust will have taxable interest by reason of the loan)? Will the trustee be willing to make unequal distributions if it overall saves income taxes? If $50,000 is distributed to a beneficiary in a no-tax state and a loan of $50,000 is made to a beneficiary of in a high tax state, will the Internal Revenue Service or a state taxing authority respect the loan be respected or be recharacterized it as a disguised DNI distribution by the IRS or a state taxing authority?

Non-grantor trusts may also be used to defer or avoid state income tax. If you live in a high tax state you can form a non-grantor trust in a no tax state and the trust income may avoid your home state’s high income tax rates. Note that there are some complications to this planning as some states have tried to clamp down on these benefits. Non-grantor trusts may help you maximize your state and local tax deductions. The possible benefits and planning use of these trusts to protect your charitable contribution deductions will be discussed below.

But a few more tax planning considerations of trusts will be helpful to understand first.

Can you create separate trusts so that you can spread income between each to save income taxes? If each trust earns less than $15,650 then income might be spread out to be taxed at brackets less than the maximum 37% bracket. The tax law provides a hurdle for that in that multiple trusts may be aggregated to prevent that result (Code Section 643(f)). If the trusts are sufficiently independent, e.g., each trust is for a different child, it may be feasible to have those trusts respected as independent. This could be important to trust planning generally, and certainly post-OBBBA.

Trusts and Charitable Deductions

Trusts can be a great tool to increase tax benefits from donations. There are several distinct income tax advantages that a non-grantor trust may have over you as an individual to benefit from contribution deductions.

Also, consider that for a non-grantor trust to provide tax benefits you have to first create the trust document, open a trust bank account, transfer assets to the trust, and have an annual trust income tax return filed (and that probably should be done by a CPA). So, there are costs, complications, hassles and some tax negatives to this. But these trusts can be created rather cost effectively, name family trustees and may be less costly or complicated then many types of trusts. Before proceeding make sure that the benefits seem to outweigh the negatives for you.

Some possible trust income tax benefits may include:

• A trust can elect to treat a distribution made during the first 65 days of the following year as if actually made during the prior year. That can provide valuable tax planning flexibility to a trust as compared to an individual taxpayer who cannot do that.
• A trust can reduce its taxable income for charitable contributions without regard to the percentage limitations (20%, 30%, 50%, 60%) of the contribution base.
• Trusts are not subject to the standard deduction.

There are also several restrictions and special rules:

• Trust donations must meet the requirements of Code Section 642(c) instead of the requirements of Code Section 170 that govern donation deductions for individual taxpayers. For example, you could personally donate an appreciated stock to a charity to claim a tax deduction (assuming you would realize a tax benefit from that deduction). A trust cannot do that as a trust must donate gross income to charity to garner a deduction. That means, unlike an individual, the trust would have to sell the stock and donate the proceeds.
• The trust document (governing instrument) must permit donations to charity. If the trust document does not name from inception the IRS’ view is that then the trust cannot qualify for charitable donation deductions. The IRS does not believe you can modify the trust (e.g., decanting) to add a charity and thereby qualify. For new trusts this should be considered. So, if you are going to create a non-grantor trust for charitable planning be certain to include charities as beneficiaries. It may be possible to have a trust that does not have charitable beneficiaries invest in a partnership or LLC that can make donations and pass the deductions up to the trust (Rev. Rul. 2004-5).

Converting Grantor Trusts to Non-Grantor Trusts and Adding Charitable Contribution Deductions

You may have one or more existing grantor trusts that were created when the gift, estate and GST exemption was much less than the OBBBA $15 million permanent inflation adjusted exemption amount. You should evaluate how those trusts may be repurposed post-OBBBA for more tax benefit. Even if there is no longer an estate tax benefit remember the law may change, the trust may provide important asset protection benefits, but it may be possible to modify the trust into a non-grantor trust to garner income tax benefits (199A, state tax deductions and charitable contributions). Review the existing grantor trust with both your estate planning attorney and CPA. Make sure that you can change the tax characterization of the trust. Also, evaluate what the income tax consequences of the conversion might be. For example, if you sold assets to a trust for a note the conversion could trigger a taxable gain. If you convert an old grantor trust to a non-grantor trust but the trust does not name charitable beneficiaries, you can use the LLC approach discussed above.

Moderate Income Charitably Inclined Client

Moderate income taxpayers may benefit from the creative trust planning mentioned above. This technique may offer an interesting option for those who are charitably inclined and unlikely to receive sufficient benefit from bunching itemized deductions into one year or for those unwilling to time their charitable gifts to bunch them in one year. This non-grantor trust planning concept may be useful for a religious taxpayer who’s accustomed to tithing and who wishes to gain some income tax benefit from doing so. You can create such a trust to benefit a class of people including your spouse, descendants and charities. To avoid grantor trust status, neither you (the settlor), nor your spouse, can benefit from the trust. Alternatively, you could have the trust require that if a distribution is to be made to your spouse that an adverse party must approve distribution. That is a person, such as an adult child, whose interests in the trust will be adversely affected by approving the distribution to your spouse. You could create a low-cost trust in your home state, as this plan may not warrant setting up the trust to a more trust tax-friendly state. You could give a portion of your securities portfolio to the trust. Distributions to heirs or charitable contributions can be made by the determination of an independent trustee. If you prefer you could name an independent distribution committee consisting of several people. Because the trust is characterized as a non-grantor trust (and it has to be planned and drafted that way to qualify), there’s no standard deduction, and income is offset by the charitable contribution deduction so long as the requirements of Code Section 642(c), mentioned above, are met. This ensures that the contributions will provide an income tax benefit and leaves the standard deduction to offset non-trust income on the client’s personal return. If the amounts available to allocate to charity exceed what is desired to give to charity in a given year, those amounts could instead be directed to the heirs listed as beneficiaries of the trust.

Example: You are charitably inclined but live in a low tax state and are unlikely to ever exceed the higher post-OBBBA standard deduction amount. You could give $250,000 of marketable securities to a non-charitable trust to benefit charities (for example, a house of worship you donate to regularly), children and other descendants. There likely will be little concern about allocating generation-skipping transfer (GST) tax exemption to a trust that’s an inefficient use of GST tax exemption (because much of the trust property won’t pass to grandchildren or other skip persons who attract GST tax) because the transfer tax exemptions enacted by OBBBA increased to $15 million which may be well above your net worth. The $250,000 generates $12,500 of taxable income each year. The trustee pays $10,000 to charity and $2,500 to your heirs. The trust deducts the $10,000 charitable contribution, and all remaining income passes out to the children as part of distributable net income (DNI). If the trust paid all $12,500 to charity and then made discretionary distributions of trust assets to the children, the children would have no gross income to report from the trust. You still qualify for the full income tax standard deduction of

Other Benefits from Your Non-grantor Charitable Trust: SALT and Section 199A Planning

If the cost or complexity of creating a non-grantor trust to potentially increase your deductions from charitable contributions seems too much also consider other benefits such a trust plan may provide. Post-OBBBA it may also be advantageous to shift income from your personal return to a non-grantor trust to lower your income to qualify for various other OBBBA income tax benefits. For example, if your income exceeds $500,000 the new $40,000 state and local tax deduction (SALT) limit is reduced. When your income reaches $600,000 the OBBBA increase is lost. So, if your income is in that phase out range shifting income producing assets to a non-grantor trust may facilitate your obtaining that full SALT deduction.

Another post-OBBBA tax planning consideration in monitoring distributions to enhance the tax benefit you may realize under the Qualified Business Income (QBI) rules. Code Section 199A.

Thus, the creation of a non-grantor trust to obtain dollar for dollar income tax deductions at the trust level, while still deducting the larger post-OBBBA standard deduction, may also support several other tax planning benefits.

Estate Tax Charitable Contribution Deduction

Charitable contributions under a will or revocable trust (i.e., by the estate) were important to many taxpayers when the estate tax exemptions were lower. But that has changed over time as the exemptions have increased, and OBBBA has further pushed that result. Estimates are that only .25% of American households have a net worth of more than $30 million (2 x the new $15 million per person exemption). That is approximately 1 out of every 400 households, or perhaps 350,000 families. Thus, few taxpayers will realize any estate tax deduction for contributions. That may further reduce what seems to be a trend of less emphasis on charitable estate tax planning as the exemption has climbed dramatically in recent years.

You Might Consider a Protective Charitable Lead Trust

There may be precautionary charitable contribution that some taxpayers might consider. Despite the new $15 million exemption being called permanent, there can be no guarantee that a future Democrat administration in Washington may not enact legislation reducing the exemption, perhaps substantially. If that happens what if you die before you can update your will or revocable trust? What if you are incapacitated (e.g., dementia) and cannot update your documents? That might result in a federal (and/or state) estate tax that otherwise could have been avoided. Perhaps the next time you update your estate planning documents you might consider adding a bequest to a charitable lead trust (CLT) designed to reduce or eliminate estate tax. With a charitable lead trust charities receive a specified payment for a specified number of years (the lead interest) and following that the assets left in the trust can pass to your heirs with little or no estate tax.

Charitable Remainder Trusts (CRTs) and Qualified Opportunity Zones (“QOZs”)

OBBBA permanently extended the QOZ benefits. QOZs are a tax incentive originally created in 2017 to stimulate investments in economically distressed communities. QOZs are located in census tracts certified to be low income by the Treasury Department. Taxpayers can invest in QOZ’s by investing directly in such a project or by participating in Qualified Opportunity Funds (“QOFs”). If you reinvest capital gains from the sale of an asset into a QOZ or QOF you can defer taxes on those gains. A partial exclusion of the deferred gains can be realized if the QOF investment is held for five years, resulting in 10% of the deferred gain to be excluded from taxation. If it is held for seven years, an additional 5% can be excluded. If held for 10 years, then new gains from a QOF are tax-free upon sale. That could be a substantial tax benefit. However, these new rules are not effective until January 1, 2027. What if you have a large gain in 2026? Is there a way you might use a QOZ to defer that gain even though it is before the effective date? You might give that asset to a charitable remainder trust and in 2027 have the CRT contribute the asset to the QOZ.

Tax Credit for Scholarships

OBBBA creates a new tax credit for cash donations to certain state approved scholarship granting organizations (SGOs). The maximum credit is $1,700. If you treat a donation to an SGO as qualifying for the credit there is no double dipping. You also cannot report that payment as a charitable contribution and claim a deduction as well.

OBBBA also provides that those receiving scholarships for qualified elementary or secondary school educational expenses do not have to report those scholarships as taxable income.

The student receiving the scholarship must come from a family whose gross income is not more than three times the median gross income of the area.

University Endowments Nailed with New Tax

OBBBA imposes a new excise tax on certain large university endowments. The excise tax rate varies based on the endowment per student: $500,000 to $750,000: 1.4%, $750,001 to $2,000,000: 4.0%, and over $2,000,000: 8.0%.

Corporations Face Contribution Limitations

Charitable contributions by corporations may not exceed 10% of corporate income. OBBBA provides that charitable contribution deductions will only be permitted if they are greater than 1% of the corporation’s taxable income.

Charities and Planned Giving

For charities and planning giving experts, these complications will need to be addressed to help donors in the new environment. Their jobs will be more difficult because planning differences between various donors will be more significant then perhaps ever before. Perhaps more challenging is that some wealthy donors may no longer have significant current income taxes to provide tax benefits from donations. Further, very few wealthy clients will face an estate tax (.2% as discussed above) so solicitation of bequests may have to acknowledge that there may be no estate tax benefit. Ultra-high net worth donors may still face an estate tax so traditional charitable estate tax planning may be beneficial for them. If only .2% of donors may face an estate tax, some charities may evaluate whether or not they have the critical mass of large donors to justify developing staff and materials to address estate tax-oriented planning. Many charities have not updated their planned giving literature and websites in quite a while and a refresh may be in order.

Conclusion

OBBBA is a massive and complex piece of legislation. It includes many provisions that directly affect charitable giving. However, the most significant affects may not be from the specific OBBBA changes but rather as indirect results of other changes. Taxpayers will benefit from holistically and creatively evaluating what their charitable giving options may be.