← ACTEC Trust & Estate Talk
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Your income tax Charitable deductions are different in 2026. That's the subject of today's ACTEC Trust and Estate Talk.
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Welcome to ACTECH Trust and Estate Talk from the American College of Trust and Estate Council, a professional society of peer elected trust and estate lawyers in the United States and around the globe. This series offers professionals best practice advice, insights and commentary on subjects that affect our profession and clients. And now our ACTEC Fellow host with today's topic.
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This is Natalie Perry, ACTEC Fellow from Chicago. The One Big Beautiful Bill act brought major changes to charitable tax incentives, changes that are expected to increase the number of taxpayers who itemize deductions to take advantage of expanded benefits. Joining us to break down what these updates mean for individuals is ACTEC Fellow Professor Christopher Hoyt from the University of Missouri School of Law in Kansas City. Chris explains what taxpayers need to know to make the most of their charitable giving strategies under the new rules. Welcome, Chris.
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Thank you, Natalie. And let's explore how the laws have changed in 2026 based on the old BBBA tax tax changes. And in Washington they're calling it OB3, which I like because it has sort of a Star wars connotation. And as we look at these rules, these rules on charitable tax deductions look like they did come from a galaxy far, far away. So first of all, more people will be able to deduct their charitable gifts in 2026 because we now have a tax deduction for non itemizers. Only about 10% of taxpayers itemize their deductions and take advantage of the charitable income tax deduction. 90% of taxpayers use the standard deduction. But now in 2026, the non itemizers are able to get a tax deduction for the charitable gifts, up to $1,000 on single returns, up to $2,000 on married joint returns. To qualify for this non itemized or charitable deduction, you have to make a cash gift, you know, cash or credit card. What will not qualify is clothing or household items. The deduction is not available for gifts to donor advised funds, private grant foundations and supporting organizations. And for a gift of $250 or more, the donor needs the same type of receipt from a charity that they would need for an itemized charitable gift, a contemporaneous written acknowledgment that describes the property donated and says, you know, you got no goods or services. The second change in 2026 is there's a new type of charity where if you give this charity, it qualifies for a tax credit that Means if you give $100 to this charity, you reduce your federal income tax bill by $100. So it's a tax credit for cash gifts to a state certified K through 12 scholarship granting charity. The most you can take as A credit is $1,700 for individuals, $3,400 on a married joint return. So every state will submit the names of these scholarship granting organizations to the Internal Revenue Service. And there's a whole bunch of rules like the donor has to be in the same state as the state certified ego. You can't earmark it for any specific student. And the grant recipients must be K12 students from families with under 300% of the median area income. So for example, in Kansas City, the median area income is $80,000. They come from families with income under $240,000. The scholarship would be tax free to the recipients. We'll learn a lot more about this as the year goes on. Now, the other change is that more taxpayers can itemize in 2026 through 2029. In the past, only 10% of taxpayers itemized. We project that to go up to 14%. And the reason is that we have a temporary law from 2025 through 2026 that people can deduct more of their state and local taxes as itemized deductions. Between 25 and 2029, they can deduct up to $40,000 of state and local taxes. This increased a little bit with inflation. So in the year 2026, they'll be able to deduct $40,400. So wealthier taxpayers pay more state income tax, state property tax, than lower income taxpayers. But there is a limit. The highest income taxpayers won't qualify for the $40,000 deduction. There's a phase out that begins at $500,000 and ends at $600,000. If a taxpayer's income over $600,000, they're stuck with the old $10,000 limit. So some tax planning for people near the $500,000 limit will be to try to keep their income under $500,000 if they can deduct the full $40,000amount. So if a taxpayer itemizes, they can get tax benefits for larger charitable gifts more than $2,000. Before we get started, I just want to highlight there's an important difference between taxpayers who are over the age of 70 and a half and taxpayers who are under the age of seven and a half. If a taxpayer is over the age of seven and a half, they have the ability to make tax free distributions. From their Individual Retirement Account IRA to charities. And that's probably the way they should go. They will avoid the complexity I'm about to talk about. For itemized deductions, they can exclude the gift from their income with a qualified charitable distribution, a qcd. But if the taxpayer is under the age of seven and a half, then usually you want to avoid using your IRA for charitable gifts. You especially want to avoid using your IRA for charitable gifts if you're under the age of 59 and a half, because not only would you have taxable income from the distribution, but there's a 10% penalty. So if a taxpayer is under the age of seven and a half and they itemize their deductions, normally they get the most tax savings if they give or appreciated stock. So there's two rules that reduce your tax benefits from itemized charitable deductions beginning in the year 2026. The first is that individuals can only deduct charitable gifts that exceed 1/2 of 1% of their adjusted gross income. So if we have a married couple with $200,000 of income, and every year they give $5,000 to charity, and they itemized their deductions in 2025, they were able to deduct all $5,000. But in 2026, they have to reduce their tax deductions by 1/2 of 1% of their income. So if their income is $200,000, 1/2, 1% is $1,000. And now even though they gave $5,000 to charity, they can only deduct $4,000. The second change applies to wealthy taxpayers who itemizes, and that is if a taxpayer is in the 37% tax bracket, the highest tax bracket, they can only get a 35% tax break from their itemized deductions, including charitable gifts. So, for example, if somebody has $900,000 of taxable income, they're in the 37% tax bracket. 37% begins at about $630,000 single, $730,000 married. So for every additional $100 they have, there's a 37% tax. They take the $100 and they give it to charity on their tax return. Then they will have $100 hit with a 37% tax rate. But when they give the $100 to charity, they're only able to reduce their taxes by 35%. There's a 2% tax on that charitable gift. And some estate planners are concerned that this also applies to the income of trusts and estates. A trust or an estate is in the 37% tax bracket with just $16,000. So we have reduced tax benefits from itemized charitable deductions beginning in the year 2026. And thus for those donors who are over the age of 70 and a half, they should use their IRA for all charitable gifts. If someone distributes $5,000 from their IRA to charity, they reduce their income by $5,000. There's no 1/2 of 1% reduction in their tax savings. Similarly, if the taxpayer has $900,000 of income and and they give 5,000 from their IRA to charity, they get 37% tax savings by avoiding having the income reported in the first place. Make the QCDS so we did a podcast in April 2025 on qualified charitable distributions, but that's the bottom line. The new tax law has made IRA giving more advantageous for taxpayers over the age of seven and a half. Thank you.
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Thank you, Chris. I appreciate your time and that was a great, informative presentation.
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Thank you for listening to this episode of ACTEC Trust and Estate Talk, the podcast series about wealth planning matters from the American College of Trust and Estate Council. To find an ACTEC lawyer near you, visit actec.org Please subscribe to this series and leave us a rating or a review.