OBBBA and Charitable Donation Deductions

The One Big Beautiful Bill Act (“OBBBA”) provided three new rules with respect to reporting and claiming itemized deductions resulting from charitable donation contributions.

1. The New 2/37ths Limitation Rule: Applying to ALL Itemized Deductions

OBBA made changes to IRC section 68 by imposing a 2/37th limitation on non-miscellaneous itemized deductions. The OBBBA repealed the so-called Pease Limitation and replaced it with this limitation. All itemized deductions will be reduced by 2/37ths of the lesser of: (a) a taxpayer’s itemized deductions and (b) the amount that a taxpayer’s taxable income exceeds the 37% bracket threshold. Itemized charitable deductions will also be impacted by this deduction limitation. Due to this limitation, high-income charitable donors will be most impacted and receive slightly smaller tax benefits from their contributions. For example, a $100,000 gift by a high-income earner will result in a tax benefit of only $35,000 instead of $37,000 (in 2025 and prior to OBBBA). This rule takes effect beginning in 2026.

2. Estates and Trusts Subject to Disallowance

Previously, estates and trusts were exempt from limitations on itemized deductions, but not anymore. Estates and trusts are also subject to the 2/37ths disallowance. For trusts and estates whose assets are entirely distributable to charity, determining the deductible amount will become more challenging than ever, and trustees and/or personal representatives will now have to set aside liquidity to pay tax on the disallowed portion.

3. The 0.5% Floor for Individuals

Starting in 2026 under OBBBA, individual taxpayers who itemize will only be allowed to take a charitable deduction to the extent their contributions exceed 0.5% of their adjusted gross income (AGI). This 0.5% floor now reduces qualifying charitable contributions by 0.5%, which in effect decreases the allowable charitable deduction. Taxpayers may carry forward the disallowed charitable contributions to future tax years over a five-year period.

This 0.5% haircut is specific to the charitable deduction and considered before applying the 2/37ths disallowance rule for all itemized deductions.

To make matters more complicated, individual taxpayers still need to account for AGI limitations for charitable contributions, which have now been made permanent under OBBBA (20% for appreciated property to nonpublic charities; 30% for cash to nonpublic charities; and 60% cash to public charities).

The following example illustrates the application of the 0.5% floor, the 2/37ths disallowance rule and AGI limitations under OBBBA:

Anna and Ben (AB) are a married couple filing jointly in 2026 with a combined AGI of $1.1 million. AB make $400,000 in charitable contributions as follows: (1) $350,000 cash to AB’s private foundation and (2) $50,000 to public charities [Assume: AB’s only itemized deduction will be the charitable deduction.]

First, the unchanged AGI limitations on charitable contributions are applied. For the gift to the private foundation, only $330,000 of the $350,000 is deductible (30% of $1.1 million). For the gift to charities, the full amount is deductible ($50,000 < 60% of $1.1 million).

Second, the 0.5% AGI floor is applied to one or more contributions. Here, the floor equals $5,500. The $330,000 deductible amount to AB’s private foundation must be reduced first by $5,500. Therefore, the total allowable charitable deduction thus far is $374,500 ($324,500 + $50,000).

Third, the 2/37ths disallowance rule is applied. Here, the charitable deduction will be reduced by 2/37ths of AB’s income that exceeds the 37% tax bracket income threshold (2/37ths of $331,299 or $17,908; assuming $768,701 for 37% tax bracket threshold in 2026).