How do the OBBBA's 2025 changes to Section 170(b)(1) alter the amount of charitable contributions I can deduct if I itemize with $500,000 AGI and no NOL carryovers?
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The One Big Beautiful Bill Act (OBBBA), effective for tax years beginning after December 31, 2025, makes several significant changes to the rules for deducting charitable contributions under IRC §170(b)(1). Here’s how these changes affect the amount you can deduct if you itemize with $500,000 AGI and no net operating loss (NOL) carryovers:
1. Introduction of a 0.5% AGI Floor for Individuals
New Rule:For tax years beginning after December 31, 2025, you may only deduct charitable contributions to the extent that the total amount exceeds 0.5% of your AGI. This is a new “floor” on the deduction, meaning the first 0.5% of AGI in charitable contributions is not deductible. For $500,000 AGI, the floor is $2,500.
- Example: If you contribute $10,000, only $7,500 ($10,000 - $2,500) is potentially deductible, subject to the other percentage limitations described below.
2. Permanent 60% AGI Limit for Cash Contributions to Public Charities
New Rule:The 60% AGI limit for cash contributions to public charities (and certain other organizations described in §170(b)(1)(A)) is made permanent. This means you can deduct up to 60% of your AGI in cash contributions to these organizations, after applying the 0.5% floor.
- Calculation: 60% of $500,000 = $300,000 (maximum for cash to public charities, after the floor).
3. Other Percentage Limits Remain
- 50% AGI Limit: For non-cash contributions (other than capital gain property) to 50% limit organizations (public charities, etc.), the limit is 50% of AGI.
- 30% AGI Limit: For contributions of capital gain property to 50% limit organizations, or for cash/non-cash contributions to certain private foundations and other non-50% organizations, the limit is 30% of AGI.
- 20% AGI Limit: For capital gain property contributed “for the use of” any qualified organization or to certain private foundations, the limit is 20% of AGI.
These limits are applied after the 0.5% floor.
4. Ordering Rules for Applying the Floor
The 0.5% floor is applied in a specific order, which affects which contributions are disallowed first if your total contributions are close to the floor. The order is:
- 20% limit (appreciated property to nonpublic charities)
- 30% capital gain property (to public charities)
- 30% noncapital gain (cash and other nonappreciated property to nonpublic charities)
- 50% or 100% (qualified conservation contributions)
- 50% (nonappreciated property to public charities)
- 60% (cash to public charities)
This means the least-favored contributions (from a tax perspective) are disallowed first.
5. Carryforward of Disallowed Amounts
If you have excess contributions that are disallowed because of the 0.5% floor, and you also have contributions that are limited by the percentage caps, the disallowed amount increases your charitable contribution carryforward for up to five years. If you have no carryforward, the disallowed amount is permanently lost.
6. Example Calculation
Suppose you have $500,000 AGI and make the following contributions in 2026:
- $20,000 cash to a public charity
- $10,000 appreciated stock (held >1 year) to a public charity
Step 1: Apply AGI Percentage Limits (ignoring the floor for now)- Cash to public charity: 60% of $500,000 = $300,000 (so $20,000 is fully within the limit)- Appreciated stock to public charity: 30% of $500,000 = $150,000 (so $10,000 is fully within the limit)
Step 2: Total contributions = $30,000
Step 3: Apply the 0.5% AGI Floor- 0.5% of $500,000 = $2,500- Only the amount above $2,500 is deductible: $30,000 - $2,500 = $27,500
Step 4: Apply Ordering Rules- The $2,500 floor is first applied to the 20% bucket, then 30% capital gain, then 30% noncapital gain, then 50%/100% conservation, then 50% nonappreciated, then 60% cash.- In this example, the $10,000 appreciated stock (30% bucket) is reduced first, so only $7,500 of the stock gift is deductible, and the full $20,000 cash is deductible, for a total of $27,500.
7. Additional Limitation: Overall Itemized Deduction Cap
OBBBA also reinstates an overall limitation on itemized deductions (not just charitable contributions). For high-income taxpayers, itemized deductions are reduced by 2/37 of the lesser of (a) total itemized deductions or (b) taxable income above the 37% bracket threshold. This may further reduce your allowable deduction.
8. Summary of Key OBBBA Changes for 2026 and Beyond
- You can only deduct charitable contributions to the extent they exceed 0.5% of AGI (for $500,000 AGI, the first $2,500 is not deductible).
- The 60% AGI limit for cash contributions to public charities is permanent.
- Other percentage limits (50%, 30%, 20%) remain, and the floor is applied in a specific order.
- Disallowed amounts due to the floor may be carried forward if you have other carryforwards; otherwise, they are lost.
- An overall itemized deduction limitation may further reduce your deduction if your income is high.
In your case, with $500,000 AGI and no NOL carryovers, you must first subtract $2,500 from your total charitable contributions before applying the percentage limits and then check if the overall itemized deduction limitation applies.
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