Financial Planning Tip August 2025

The recently signed One Big Beautiful Bill Act (OBBBA) contains many changes to the tax code. We plan on highlighting some of the most salient items in our upcoming monthly financial planning tips. We'll start with charitable giving so that clients can change their giving strategies while there's still plenty of time to do so in 2025.

We think this is important because starting in 2026, charitable contributions become less valuable in reducing one's tax bill. There are a number of reasons why. First, charitable deductions that are itemized on Schedule A will be subject to a 0.5% AGI floor. For a married couple with adjusted gross income of $200,000, that means the first $1,000 of charitable contributions won't count toward itemized deductions. Second, the standard deduction is set to climb for those over age 65 (subject to income limitations), which will reduce the number of seniors who find it advantageous to itemize. Third, taxpayers in the highest tax bracket of 37% will only be able to claim itemized deductions at the 35% rate next year. Finally, $1,000 (or $2,000 for married couples) worth of cash contributions can be deducted regardless of whether one itemizes deductions.

In light of the upcoming changes, we would suggest clients consider the following strategies, and discuss them with their tax preparers: 

• Consider an all-or-nothing approach to claiming deductions: group charitable contributions in certain years to get the most benefit from itemizing, and reduce them in other years. It would be particularly beneficial to make 2025 an "itemizing" year, because charitable contributions will be subject to a floor next year.

• A donor advised fund (DAF) will be very helpful if following this approach. If you already have one, consider making a gift to it in 2025. If you don't have one, we're happy to explain why they make sense for clients who make significant gifts to charities each year. 

• Be aware of the deduction limits on charitable gifts. While they haven't changed, there is a cap of 60% of one's AGI when donating cash and 30% when donating appreciated stock, with excess amounts being carried forward.

• Qualifying Charitable Distributions (QCDs) are now even more beneficial for those who do take distributions from retirement accounts. QCDs are not affected by the new rules. Taxpayers can make a QCD and a separate cash gift of $1,000 per taxpayer, deducting the latter without itemizing.

• If you plan on making contributions of property or securities, remember that only cash contributions are eligible for the $1,000-per-taxpayer deduction in 2026. It likely makes sense to make those contributions in 2025 instead.

• An unusual quirk of the $1,000-per-taxpayer deduction: It will reduce taxable income, but it will not reduce AGI. That means Medicare IRMAA surcharges won't be affected by contributions made in this manner.