The One Big Beautiful Bill Act (the “O3BA”), signed into law on July 4, 2025, affects charitable donors and the organizations they support. While most relevant provisions apply for tax years beginning on or after January 1, 2026, the coming changes may impact strategies for 2025 giving as well. Charitable Giving Heightened Exemptions The O3BA increases the personal exemption and extends the high estate and gift tax exemption limit, both of which would have sunset to prior levels at the end of this year.  Charitable organizations are concerned that these increases may have the effect of discouraging lifetime charitable gifts or bequests at death that are, in whole or in part, driven by tax reduction goals.  Specifically, the standard deduction has been permanently increased and enhanced for 2025 and beyond: $31,500 for joint filers, $23,625 for heads of household, and $15,750 for singles. The deduction is adjusted annually for inflation beginning in 2026. The current levels of exemption would have dropped nearly by half without the extension in the O3BA. Because these higher exemption amounts are extended and enhanced, fewer taxpayers will benefit from itemizing deductions.  Consider bunching charitable donations into a single year to exceed the standard deduction, then take the standard deduction in alternate years. Similarly, the estate and gift tax exemption would have fallen to roughly $7 million next year (from its current level of $13,990,000) without the new law, which sets the exemption to $15 million per individual ($30 million per married couple) beginning in 2026, indexed for inflation with no scheduled sunset. Allowable Charitable Deductions for Nonitemizers For the calendar year 2021 a temporary allowance of a deduction for small charitable contributions of cash ($300 or $600 in the case of a joint return) was permitted to taxpayers not electing to itemize their deductions.  Beginning in 2026 and thereafter, this allowance for nonitemizers has been made permanent and increased by more than 3-fold to $1,000 or $2,000 in the case of a joint return.  In many cases, this benefit will be negated by the newly introduced floor on charitable contributions discussed below. The capped charitable deduction for nonitemizers is not available for contributions to (i) most private grant-making foundations, (ii) supporting organizations or (iii) donor advised funds. Extension of 60% Limitation for Certain Cash Gifts The O3BA extends permanently the ability to take into account in any taxable year charitable contributions of cash to qualifying charities for up to 60% of the taxpayer’s contribution base (adjusted gross income (“AGI”) computed without regard to any net operating loss carryback to the taxable year).  Most grant-making private foundations will not qualify for this enhanced deduction. Tax Credit for Donations to Designated Scholarship Granting Organizations Beginning in 2027, a taxpayer residing in a state that has elected to participate may obtain a tax credit of up to $1,700 for cash contributions made to scholarship granting organizations (“SGOs”).  An SGO must be approved by the state and identified on a list of such organizations that the state submits to the Secretary of the Treasury.  An SGO must provide scholarships to students residing in the SGO’s state who are eligible to attend K-12 public school and whose families earn no more than 300% of the median gross income of the applicable area.  The scholarship award may fund only qualified elementary and secondary education expenses, including (i) tuition, fees, academic tutoring, special needs services, books, supplies, and other equipment, such as computer technology or equipment or Internet access, and (ii) room and board, uniforms, transportation, and supplementary items and services (including extended day programs) that are required or provided by the public, private, or religious school where the student is enrolled. The credit is in lieu of a charitable income tax deduction (no double dipping) and is reduced by any amount allowed as a similar credit offered at the state level.  If the credit exceeds limits applied elsewhere in the Code, the tax credit may be carried forward for five years.  The scholarship amount received by a taxpayer or dependent is excluded from gross income. Introduction of Charitable Contribution Floor While the deduction opportunities for nonitemizers is broadened and the 60% limitation is made permanent (good for charities and donors), further limitations are introduced for individuals and corporate donors for tax years beginning on or after January 1, 2026. For individual taxpayers, a charitable income tax deduction will only be available for contributions that exceed .5% (one-half of one percent) of the individual’s contribution base.  For example, if an itemizing taxpayer has a contribution base of $400,000, no income tax deduction will be allowed for the first $2,000 of charitable gifts made because of this floor.  The new floor on charitable contributions applies universally regardless of whether the taxpayer elects to itemize deductions or instead takes the standard deduction plus the enhanced deduction for nonitemizers discussed above.  Contributions disallowed to itemizers because of the .5% floor may be carried forward, but only from a year in which percentage limitations have been exceeded.  However, contributions claimed as a deduction for nonitemizers do not carry forward.  If disallowed due to the .5% floor they are lost permanently.  The interaction between the .5% floor and the non-itemizer allowance creates somewhat of an incongruity.  Congress reinstated the non-itemizer charitable deduction to encourage charitable giving but then imposed a floor that effectively nullifies it for many middle- and upper-income taxpayers.  For example, joint filers with $400,000 of AGI make $2,000 in cash contributions and do not itemize.  No deduction is allowed because of the .5% floor even though it would otherwise be allowable under the non-itemizer benefit.  For corporate donors, the charitable floor in 2026 forward will be 1% (double that for individual taxpayers).  Thus, a charitable deduction will only be available for contributions that (i) exceed 1% of the corporation’s taxable income for the year and (ii) do not exceed 10% of such income.  Contributions disallowed by reason of the 1% floor may be carried forward, but only from years in which the 10% limit is exceeded. Income Tax Rates and Reintroduction of Overall Limitation on Itemized Deductions (the Pease limitation) The Tax Cuts and Jobs Act (“TCJA”) modified and lowered income tax rates and suspended the application of an overall limitation on itemized deductions for calendar tax years 2018 through 2025.  For 2026 going forward, the O3BA extended and enhanced the reduced income tax rates that were scheduled to revert to higher levels under the sunset of the TCJA.  Further, the overall limitation on itemized deductions (the so-called Pease limitation) returns to the law with modifications made by the O3BA.  The TCJA tax brackets for individuals that will continue for 2026 and thereafter are: 10%, 12%, 22%, 24%, 32%, 35% and 37%.[1]  Moreover, TCJA expanded the income range for each bracket.  The TCJA did not change the tax rates on net capital gains and qualified dividends (0%, 15% and 20%) but did modify the breakpoints at which those rates apply for 2018 through 2025.  Accordingly, the tax benefit of charitable contributions will continue to be measured under the reduced income tax rates of the TCJA which are now made permanent.  The new overall limitation on itemized deductions (including the charitable contribution deduction) will reduce the deductions otherwise allowable by 2/37ths (about 5.4%) of the lesser of: (i) the amount of such deductions; or (ii) the amount of taxable income in excess of the break point for taxing income at the 37% rate.  For example, a high bracket taxpayer with $100,000 of itemized deductions would have their deductions reduced by $5,405 (2/37ths) leaving $94,595 deductible.  The lost tax benefit for this reduction would be $2,000 (37% of 5,405).  Thus, the tax benefit for the $100,000 of deductions is reduced from the expected $37,000 at the top bracket to only $35,000.  The 2/37ths fraction is designed to reduce the tax benefit for top bracket taxpayers from 37% to 35%.  The effect of this limitation is a marginal tax rate increase for high income taxpayers but in a way that scales with income and deduction size.  It is a smoother, less punitive alternative to the old Pease limitation.  Strategies for Giving? Individuals who itemize and corporate donors might consider accelerating charitable gifts planned for 2026 into 2025 to avoid the new deduction floors that kick in next year.  Going forward, for some taxpayers it may make sense to strategize about when to itemize -- bunching charitable gifts into “itemizing” years -- and to otherwise claim the standard deduction while also taking advantage of the allowed $1,000 deduction for nonitemizers.  Other provisions of the O3BA, such as the temporary increase in the cap for federal deductions for state and local taxes, will play into these decisions as well. All in all, the O3BA has made a complex area of tax law even more so. Increased Excise Taxes on certain Charitable Organizations College and University Endowments An excise tax on the net investment income of private colleges and universities with large endowments was introduced in 2018.  While sparing smaller schools, the O3BA increases the excise tax that may apply.  Under current law, an excise tax of 1.4% is imposed on the net investment income of a private college or university with more than 500 tuition-paying students (at least half of which are located in the US), if its investment assets (“endowment”) per student, are at least $500,000.  Under the O3BA only schools with at least 3,000 tuition-paying students and large endowments are targeted.  A tiered excise system is introduced: Endowment per Student Applicable Excise Tax $500,000 to $750,000 1.4% $751,000 to $2,000,000 4% More than $2,000,000 8% The O3BA also expands what is included in investment income to encompass interest received on student loans made by the college or university (or a related party), as well as federally subsidized royalty income. Colleges and universities impacted by the increased excise might work with their advisors to consider ways to lessen the burden of the increased excise, such as modifying investments or directing donors of endowment gifts to designated funds or donor advised funds at other public charities or community foundations.  Excise Tax on Compensation over One Million Dollars Since 2018, a tax-exempt organization has been subject to a 21% excise tax on compensation paid to its five highest compensated employees (including certain prior employees) that is in excess of $1,000,000.  Beginning in 2026, the O3BA eliminates the “five highest” requirement, meaning the 21% excise tax is due on compensation paid to any employee to the extent that compensation for that employee exceeds the $1,000,000 threshold. *** If you have any questions or would like to discuss this Client Alert, please contact one of the Sullivan lawyers listed above. [1] The pre-TCJA tax brackets that will now not come back into effect were scheduled to be: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.

John Graham submitted a comment letter to the Internal Revenue Service regarding the proposed regulations under Section 4966 of the Internal Revenue Code 1, REG-142338-07, on January 16, 2024. The comments were published in the 2024-14 edition of EO Tax Journal [sub. req'd] on January 25, 2024. Read John's Comments