Understanding Charitable Contributions and Donor-Advised Funds in 2026

The New Charitable Deduction Floor

In 2026, individuals making charitable contributions will face a new “floor” for charitable deductions of ½ of 1% (.005) of their Adjusted Gross Income (AGI). This means that for an individual with a family AGI of $200,000, a donation of $2,500 will result in a loss of the first $1,000 of the deduction. Specifically, the calculation is as follows: $200,000 x .005 = $1,000. Therefore, the individual will only qualify for a net deduction of $1,500.

Fortunately, this new floor does not apply in 2025. Individuals should seriously consider making their 2026 contributions in 2025 to maximize their benefits. One effective strategy is to fund a donor-advised fund.

What is a Donor-Advised Fund?

A donor-advised fund (DAF) is a charitable vehicle housed within a §501(c)(3) public charity. It allows donors to make a gift, take an immediate charitable deduction, and recommend future grants from the funds in the DAF. Unlike private foundations, which require a minimum annual distribution, a DAF has no such requirements. This flexibility allows investment funds within the account to grow for years or even decades.

Benefits of Using a Donor-Advised Fund

A donor-advised fund is an excellent way to navigate the relatively high standard deduction on taxes. This high standard deduction may limit a taxpayer’s ability to gain additional write-offs for charitable contributions. By using a DAF, taxpayers can generate the deduction this year while distributing the funds in future years.

When a taxpayer makes a charitable contribution to a DAF before the year ends, they can deduct that amount as a charitable gift for the current year, subject to the 60% of AGI limit. Meanwhile, the funds can grow tax-free within the account, providing even more benefits to the charity in the long run.

Control Over Charitable Giving

From the perspective of the organizations supported by the taxpayer, nothing changes. However, the DAF allows the taxpayer to control the timing and amount of their charitable tax deduction. This control can be particularly advantageous for individuals looking to optimize their tax strategy.

Where to Find Donor-Advised Funds

DAFs are offered by various financial institutions, including Fidelity, Vanguard, and most brokerage houses. This wide availability makes it easier for individuals to set up a DAF that meets their charitable giving goals.

Conclusion

In summary, the new charitable deduction floor in 2026 presents unique challenges for taxpayers. However, by utilizing donor-advised funds, individuals can effectively manage their charitable contributions and maximize their tax benefits. It's essential to plan ahead and consider making contributions in 2025 to avoid the new deduction floor.

For more information on how to navigate these changes, consider consulting with a tax professional or exploring resources available through organizations like TaxSpeaker.

By understanding the implications of the new rules and leveraging tools like donor-advised funds, taxpayers can continue to support their favorite charities while optimizing their tax situation.