The "One Big Beautiful Bill" (OBBB) made several changes related to charitable contributions that could affect the use of Donor-Advised Funds (DAFs), particularly regarding how they are used for charitable giving and tax deductions.
Here are the key changes and their implications for DAFs:
- Universal Charitable Deduction Exclusion: The OBBB allows a deduction for up to $1,000 for single filers and $2,000 for married couples filing jointly for qualified charitable contributions, even if the taxpayer does not itemize deductions on their tax return. However, it appears that contributions made to DAFs are not eligible for this new deduction.
- New Floor for Itemized Deductions: For individuals who itemize their deductions, the OBBB establishes a new floor. Charitable contributions are only deductible to the extent that they exceed 0.5% of the taxpayer's Adjusted Gross Income (AGI). This change makes "bunching" or "bundling" contributions more attractive, where a donor makes a large contribution in a single year to clear the new AGI floor. DAFs are a highly effective tool for this strategy, as a donor can make a large, tax-deductible contribution to their DAF in one year and then recommend grants to charities over the next several years.
- Deduction Cap for High-Income Earners: The bill caps the tax benefit of charitable deductions at a 35% marginal rate for high-income earners who are in the 37% tax bracket. This reduces the dollar-for-dollar value of their charitable deductions. An individual in a high tax bracket that makes significant charitable contribution during the year may have this limit imposed on the deduction they are eligible for.
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Permanent 60% of AGI Limit: The OBBB makes the 60% of AGI contribution limit for cash gifts permanent, which was previously scheduled to expire. This provides certainty for those who make large cash contributions, including those to DAFs.
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