Five ways to deduct donations in the U.S. with OBBBA changes
There are five ways for individuals to deduct charitable donations on a U.S. tax return.
- charitable donation deduction in addition to the standard deduction;
- itemized deductions;
- qualified charitable distributions from an IRA;
- funding a Donor Advised Fund (DAF); and
- funding a Charitable Remainder Trust, or a CRAT.
The first two are do-it-yourself. The next three require custodians.
First – some foundational information and concepts
A tax-deductible donation includes a completed gift of:
- Cash, check, funds charged to a credit card;
- Appreciated securities or other similar capital gains property (valued at FMV);
- New goods, such as food, tools, clothing, etc. (at cost);
- Used property in serviceable condition, or with a salvage value in the case of vehicles (valued at the benefit conferred on the charity e.g., thrift store value); and
- Your mileage and out of pocket expenses to perform charitable work
You may not deduct anything for the time and expertise you devote to charitable volunteer work, without also including that amount in your income. You can’t deduct the cost of lottery or raffle tickets even if you don’t win because these are games of chance and not completed gifts. If you receive goods or services in exchange for your donation, for instance dinner tickets, you must deduct the fair market value of those goods or services to calculate the actual net charitable donation.
Helping someone through a GoFundMe, while admirable, does not count as a tax-deductible donation. The recipient organization must be a qualified charitable organization, such as a 501(c)(3) public charity. The IRS has a tool to look up organizations to see if they are a legitimate tax-exempt organization eligible to receive tax-deductible donations. Qualified organizations are generally nonprofit groups with a religious, charitable, educational, scientific, or literary purpose, or which protect the rights and safety of people or animals. Political organizations and campaigns are not qualified to receive tax-deductible donations. You must receive a receipt for your donation at or around the time of your gift, not when you have to respond to an audit.
Qualifying charitable organizations are organized or created under the laws of the United States, a U.S. state, the District of Columbia, or any possession of the United States. If you have income from Canadian, Mexican, or Israeli sources, you may be able to deduct donations to charities organized in those countries, subject to percentage income limits of your income from those countries. Foreign charities qualify if they would have qualified had they been organized in the United States. For Canada, this would mean that they are a ‘registered charity.’
Donations to Canadian and Mexican charities are limited to the same percentage of AGI as applies to U.S. charities but considering only Canadian and Mexican sourced income. Donations to Israeli charities are limited to 25% of your income from Israeli sources.
Limits on deductions vary based on what you are donating and to whom you are donating.
At a very high level, non-cash donations (stuff) are limited to 30% of your Adjusted Gross Income (AGI). Cash donations to public charities are limited to 60% of AGI. Donations to private foundations are limited to 30% of AGI. Donations of appreciated property at FMV to public charities are limited to 30% of AGI. Donations of appreciated property at FMV to private foundations are limited to 20% of AGI. There is also a 100% (50% to private foundations) of AGI category for conservation property donated by farmers and ranchers.
Donations should be deducted first in the year in which they are made. Unused donations (over the AGI limit) will be carried forward for up to 5 years (15 years for conservation property).
A half of 1% of AGI threshold for itemized charitable contributions was introduced by the OBBBA and comes into effect for 2026 tax returns. This will operate similarly to the 7.5% of AGI threshold for medical expenses.
Next – back to our five ways of deducting charitable contributions
1) A Charitable Donation Deduction for non-itemizers was first introduced in 2020 to encourage donations during the pandemic. In 2020, any filer could deduct up to $300 of charitable donations in addition to the standard deduction. This changed to $300 for single filers and $600 for joint filers in 2021. For 2022 through the present, this additional deduction was not allowed on the federal return, but several states offered a comparable deduction. OBBBA has brought the deduction back for tax years 2026 and forward. The amount of cash charitable donations that may be deducted in addition to the standard deduction is limited to $2,000 for joint filers and $1,000 for all others. This is not available for gifts of property.
2) Not many people itemize deductions these days, because the standard deduction is very generous and is usually more advantageous than itemizing. Itemized deductions are comprised mainly of:
- Medical expenses over a 7.5% AGI threshold
- State and local taxes (SALT) subject to a Cap between $10,000 and $40,000, depending on your income
- Mortgage and investment interest (also subject to caps)
- Disaster and casualty losses (subject to thresholds and haircuts)
- Charitable donations (subject to income limits)
From 2018 through 2024, most people only itemized if they had catastrophic medical expenses or sizeable donations. With the raise of the SALT cap, we will need to look at the math again.
Assuming that you intend to itemize deductions because of your donations, keep in mind that your charitable donations will be subject to a 0.5% of AGI threshold starting in 2026. A time-tested strategy is to make the bulk of your donations every other year and take the standard deduction in the intervening years. 2025 would be a good year to itemize to avoid the threshold in 2026. Also in 2026, the tax benefit for itemized charitable contributions will be capped at 35%, even if the taxpayer is in the 37% bracket.
3) If you are at least 70 ½ years old and have an IRA, you can divert up to $105,000 (each for 2025) to a qualified charity, annually. This is called a Qualified Charitable Distribution (QCD). QCDs cannot be made to a donor-advised fund or a private foundation. A QCD is a tax-free IRA distribution, bypasses itemized deductions and is not subject to the 0.5% threshold that starts in 2026. QCDs must be made directly from the IRA custodian to the charity.
Assume a married couple, John and Mary, are both over 70 ½ years of age and each have a Required Minimum Distribution (RMD) of $36,000 in 2025. They each have their IRA custodian redirect $30,000 of that RMD to a qualified charity as a QCD. Their 2025 tax return will show IRA income of ($36,000 – $30,000) x 2 = $12,000 instead of $72,000. They will still be eligible for the MFJ standard deduction of $31,500 and the additional standard deductions of $1,600 each for being at least 65 years of age. If their joint income is under $350,000, they will qualify for an Additional Seniors Deduction of up to $6,000 each.
Using the QCD to reduce AGI in high income years opens the door to other AGI-based benefits. With a lower AGI, you may also pay less for Medicare.
4) A Donor Advised Fund (DAF) allows you to take an itemized deduction for the year in which you contribute to the DAF – subject to all the 60% / 30% AGI limits, 0.5% threshold and carry-over provisions explained above. However, the funds may be held in the DAF, grow tax-free, and be granted to the qualified charities over time. You can use a DAF as a way of bunching your charitable contributions to make itemizing worthwhile in a particular year, while providing stable yearly funding to your favorite organizations. Donor Advised Funds are professionally managed by a custodian. You, as the donor, decide how much and to whom funds are granted.
5) Charitable Remainder Unitrusts (CRUTs) are strictly structured trusts that allow you a tax deduction in the year the CRUT is formed and funded as long as the amount the charity will receive at the end of the trust term is at least 10% of the FMV of the original contribution to the trust. These are most often used to defer gains on large, appreciated assets since the assets funding the CRUT are transferred in at the donor’s basis, not FMV. The rules are a bit complex and beyond the scope of this article.
Another trust vehicle is the Charitable Remainder Annuity Trust (CRAT). Both CRUTs and CRATs are irrevocable and subject to detailed rules and annual tax return reporting.
Gift Tax Returns
Qualified charitable contributions do not reduce your lifetime gift and estate tax exemption. If you otherwise are required to file a gift tax return, for instance to super-fund a 529 plan or to split ‘taxable’ gifts, your charitable contributions should be reported on that gift tax return but marked as charitable and excludable.
Key Takeaways
If your charitable donations are modest and you do not have significant medical expenses or SALT deductions, take advantage of the additional charitable donation deduction of up to $2,000 per couple.
However, if your charitable giving is more substantial, consider pulling as much giving into your 2025 tax year before the 0.5% threshold kicks in. A donor-advised fund might be right for you.
If you have Required Minimum Distributions for this year, consider making your donations as QCDs instead of itemizing, to both avoid the 0.5% floor and reduce your AGI – and therefore your tax burden.
Every taxpayer’s situation is different and may involve multiple country considerations. The team at Cardinal Point are wealth planning and U.S. – Canada cross-border specialists. We follow the continually evolving tax laws, cutting through the rhetoric to help our clients make the most of their opportunities. Talk to your Private Wealth Manager to better understand what will work best for you.