The One Big Beautiful Bill Act (OBBBA) introduced additional complexity to charitable giving by implementing a 0.5% of AGI (Adjusted Gross Income) floor for charitable contribution deductions. Effectively, charitable gifts up to 0.5% of a taxpayer’s income are not deductible and do not reduce the amount of taxes paid. Charitable gift planning is now even more important.
One effective strategy is “bunching” charitable gifts by making several years’ worth of contributions at once, often through a Donor-Advised Fund (DAF). The deduction is received when the transfer is made allowing the donor to receive a larger deduction in a single year while maintaining the flexibility to distribute grants to charities over time.
For example, a taxpayer with $300,000 of AGI who donates $10,000 annually would only receive a deduction of $8,500 each year after applying for the 0.5% AGI floor. Over five years, total deductible contributions would equal $42,500. Alternatively, if the taxpayer contributes five years of planned gifts ($50,000) to a DAF in a single year, the deductible amount would be $48,500. Because the 0.5% AGI floor is applied only once, bunching gifts can result in a larger overall charitable deduction.
The introduction of the 0.5% AGI floor has increased the importance of thoughtful charitable giving strategies, as the timing and structure of contributions can materially affect the tax benefits received. For taxpayers with ongoing philanthropic objectives, consolidating multiple years of charitable gifts through a donor-advised fund may enhance overall tax efficiency by maximizing deductible contributions.
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