Philanthropic-minded individuals face changes to their charitable giving strategies as new tax provisions take effect in 2026. The One Big Beautiful Bill Act (OBBBA) introduces both opportunities and limitations that require attention to maximize tax benefits while achieving philanthropic goals.
OBBBA Provisions
The OBBBA provisions alter the charitable deduction landscape. Non-itemizers can now claim up to $1,000 in charitable deductions ($2,000 for married couples filing jointly), while itemizers face a new threshold requiring contributions to exceed 0.5% of adjusted gross income before any deduction applies. The cash contribution limit of 60% of adjusted gross income (AGI) is retained, but taxpayers in the top 37% bracket encounter a 35% cap on their charitable contributions. These changes create a compelling case for bunching charitable contributions into single tax years. Rather than spreading donations across multiple years, donors may find greater tax efficiency by concentrating their giving to surpass the 0.5% AGI threshold and maximize deductions within the applicable limits.
Donor-Advised Funds: A Strategic Solution
Donor-advised funds (DAFs) emerge as particularly valuable tools under the new framework. These funds, held by public charities as sponsoring organizations, allow donors to make current-year contributions that qualify for immediate tax deductions, while retaining the flexibility to recommend distributions to specific charities in future years.
The public charity status of DAF sponsors provides access to more favorable AGI limitation rules, making them especially attractive for donors seeking to optimize their tax position. However, DAFs operate under certain restrictions that distinguish them from direct charitable giving to public charities. Qualified charitable distributions from IRAs cannot be made to DAFs, and these funds are subject to self-dealing rules and excess business-holding restrictions, similar to private foundations.
The donor’s role in a DAF is advisory rather than controlling. While donors and their family members may recommend distributions and investment strategies, the sponsoring organization retains ultimate authority over fund management and charitable distributions. This arrangement occasionally creates tension, as evidenced by recent court cases involving disagreements between sponsors and donors over asset management and distribution decisions.
DAF Operational Considerations and Documentation
Establishing a DAF requires entering into a written gift instrument with the sponsoring charity. This document governs critical aspects of the fund’s management, including distribution amounts, program purposes and the composition and role of advisory committees. Some sponsors impose sunset provisions that eliminate the donor family’s advisory role after a specified period or number of generations, consolidating the fund with other assets for broader philanthropic impact.
The administrative advantages of DAFs become apparent when compared to private foundations. While private foundations require donors to create separate legal entities with independent accounting, investment management and annual tax filing obligations, these responsibilities for a DAF are handled by the sponsoring organization. This arrangement provides professional management while reducing the donor’s administrative burden. Donors weigh these advantages of a DAF against the control they and their family would gain with a private family foundation.
Comparing Alternatives
For donors considering their philanthropic structure options, the choice between DAFs and private foundations involves weighing control against convenience. Private foundations offer greater donor control over distributions and investment decisions but require considerable administrative infrastructure. DAFs provide professional management while limiting donor control to an advisory capacity.
The new tax environment makes timing particularly crucial. Donors who previously spread contributions across multiple years may need to recalibrate their strategies to account for the 0.5% AGI threshold and the enhanced benefits of concentrated giving.
For additional guidance on charitable giving strategies under the OBBBA and their implications for your philanthropic planning, please contact Sheryl Morrison or any member of Lathrop GPM’s Private Client Services team.