Tax deduction changes you should know about NOW

The end of ACA health insurance premium subsidies for modest-income Americans has dominated public attention paid to the “One Big Beautiful Bill Act” (OBBBA) that was rammed into law along party lines this summer. As it should, because losing affordable healthcare can mean life or death for some people. But more financially-comfortable Americans may have missed the memo that OBBBA has changes in store for us too.

Surprise, Some Good News!

A big plus for middle-to-upper-middle income taxpayers is relief from the ridiculously low state and local income tax (SALT) deduction cap that has been decimating our itemized deductions since 2018. The cap is now $40,000 per taxpaying household per year, up from the measly $10,000 that virtually every homeowner in states with an income tax was banging their head into.

The higher cap is effective NOW, for 2025, until 2029 or Congress acts to change it again. Households with income over $500,000 will have the cap phased back down towards $10,000, but most taxpayers will see a big boost in their potential itemized deductions when they file their 2025 taxes early next year.

But Charity Takes It on the Chin

But while Congress gives with one hand, it often takes away with the other. The trade-off taken from itemizers (and there will be a lot more of us again, due to the SALT change) is a new floor on charitable deductions, beginning January 1, 2026. Henceforth, the first 0.5% of adjusted gross income (AGI) given to charity will not be allowed as a charitable deduction.

If you’re a religious tither giving 10% of your gross income to charity, or a big philanthropist giving stock up to 30% of your income, or cash proceeds from the sale of a business up to 60%, this half-a-percent haircut will have a relatively small impact on your tax bills.

But if you’re the more typical American giving 2% of your income to charities each year, this change will cut out a quarter of your charitable deduction.

Yes, you have much bigger things to worry about, but this change is irksome. A small pecuniary shove aimed squarely at the people trying to be good citizens of their communities, balancing their budgets while giving back modestly and quietly.

Making the Most of Your Donation Budget

So what can you do? One option, if you have the means, is to front-load the charitable gifts you’re planning for the next couple of years into 2025. No haircut if you get the money into the hands of a charity by December 31 this year.

Going forward, you might consider “bunching” your charitable donations every other year. If you give 4% of income one year, only 1/8th of the deduction is lost, and then the next year you give 0% to charity so there is no deduction to lose.

If you’re on the border of itemizing or not, the bunching strategy can work particularly well. The OBBBA granted non-itemizers a new $1,000 per year charitable deduction on top of the standard deduction ($2,000 for a married couple), starting January 1, 2026. So you can alternate between bigger donations in itemizing years and $1,000 donations in your standard deduction years.

You, Too, Can Have a Donor Advised Fund!

Donor advised funds (DAFs) make it easy to front-load or bunch your charitable donations. You can give the money to the DAF now and decide later what charities will get distributions. You can also set a DAF up to give a steady monthly stream to your preferred charities, so your bunching strategy doesn’t mess with their cash flow planning.

Think you’re not wealthy enough to set up a donor advised fund? I have great news I just learned myself! Daffy.org is designed specifically to make it easy for small donors to take advantage of all the benefits of a DAF with only $3 a month management fees. It’s fast and easy to create an account and fund it with your 3-, 4-, or 5-figure donations.

This past Sunday, I gave a presentation at my church about maximizing the impact of gifts through tax planning like this. My readers are welcome to take a look at the slide deck and apply these same principles to benefit the public charities of their choice.

Our communities need mutual aid more than ever. Let’s stretch our ability to give back as much as we can as we enter the holiday season and bring this challenging year to an end.