One of the most striking things about the One Big Beautiful Bill Act is that so many provisions get phased out after just a few years, for example, the state and local tax deduction cap, taxes on tips or overtime and an enhanced deduction for seniors. And then there are all the funky carve-outs for schoolteacher spending reimbursement to equipment deductions for whale hunters. Plus, there are new rules and phaseouts for charitable deductions.
With so many conflicting dates and special interests, it’s nearly impossible to keep track, which will make tax preparation and planning increasingly important. Remember that any provision with the word “permanent” attached to it means it’s permanent until a new administration decides to change it. And that’s just at the federal level.
Individual states are getting more aggressive about their own estate taxes. For instance, the state of Washington’s estate tax now ranges from 10% to 35% with an exemption threshold of only $3 million. Meanwhile, Oregon’s estate tax exemption amount of only $1 million (set in 2001) isn’t adjusted for inflation. So, any estate above $1 million pays estate taxes ranging from 10% to 16%. That’s on top of the federal rate, which can be as high as 40%.
What Can Advisors Do?
Advisors call me all the time asking what they should do to help their clients. My response is simple: “Just keep on planning, because we just don’t know what the future holds.” That means growing as much wealth as possible outside of your clients’ estates, so it will never be subject to tax. Also, planning involves more than just shifting wealth. It involves creditor protection and finding ways to keep the wealth out of Gen 2’s and Gen 3’s estates.
In many ways, you can think of estate planning and charitable giving as a hedge against tax policy volatility and uncertainty. Most clients find charitable giving preferable to paying higher taxes because it gives them a sense of control over where their dollars go. Over my four-decade career, I’ve found that even the most inefficient charity is more efficient than the U.S. government.
Granted, we can’t expect the government to do everything, and voluntary giving has been around since ancient times. The word “philanthropy” has roots in Greek. It combines the prefix “phil-“ (meaning “love”) and the root “anthropos” (meaning “humanity” or “mankind”).
Yet, many advisors encourage clients to give just to save taxes. But that’s not a strong motivator for most clients. The annual U.S. Trust Study of the Philanthropic Conversation found that nearly half of the surveyed advisors (46%) thought “reducing tax burden” was a primary motivation for their clients to give. But only one in 10 (10%) of high-net-worth (HNW) individuals cited tax mitigation as their motivation for giving. This disconnect becomes apparent when clients have (or are planning to have) a big liquidity event such as selling a business or a piece of real estate.
Real World Example
One of our clients was in the process of selling the highly successful business he founded from scratch 35 years ago. During the negotiation process (before the sale was finalized), we transferred almost one-third of the pre-sale proceeds to a charitable trust for him and his wife. This transaction provided a significant charitable deduction, saved capital gains taxes on $10 million and will provide a good portion of the couple’s cash flow in retirement. Beating the taxman paid huge dividends for our client and greatly helped the charities the couple support.
Impact on Charitable Giving
I know some advisors are encouraging clients to accelerate their giving before the OBBBA goes into effect (see below). To me, this is a lot like trying to time the stock and real estate markets. It’s nearly impossible to get the timing right, and the rules of the game will keep changing. Instead, encourage your clients to give when they have major liquidity events or simply when the time is right for them to do so. Don’t let them be swayed by tax policy. It’s like changing the wheels on a bus as it’s rolling down the highway. Regarding charitable deductions, here are some important new provisions of the OBBBA that aren’t likely to impact charitable giving as much as some advisors would think. Let’s take them one at a time.
0.5% floor on itemized deductions. Effective for tax years beginning after Dec. 31, 2025, individuals who itemize can still deduct charitable contributions that exceed 0.5% (1/200th) of their adjusted gross income (AGI). This means that only the first 0.5% of AGI in charitable contributions isn’t deductible. For example, if a client’s AGI is $1 million, only the first $5,000 of charitable donations won’t be deductible. Do you think that’s going to matter to philanthropically inclined HNW individuals?
Any contributions exceeding this floor are still subject to the usual (highly generous) AGI limits (for example, 60% for cash contributions to public charities).
Permanent 60% AGI limit for cash contributions to public charities. The increased limit of 60% of AGI for cash contributions to public charities, previously set to expire, has been made permanent. This means individuals who itemize can continue to deduct cash donations to qualifying organizations up to 60% of their AGI. What’s not to like?
New cap on itemized deductions for high-income earners. For clients in the top tax bracket, the value of all itemized deductions, including the charitable deduction, is capped at 35% effective starting in tax year 2026. Many worry that high-income filers won’t receive the full benefit of the 37% top marginal tax rate on their charitable contributions. Trust me. These are minimal percentage point differences when all the other deductions, credits and deferrals available to generous HNW individuals are factored in.
Carryover rules. If a client’s charitable contributions exceed the applicable percentage limits (including the new 0.5% floor), any excess contributions may generally be carried forward and deducted over the following five tax years. However, all current year contributions must be deducted first, and the carryover contributions are subject to the same percentage limits in the year to which they’re carried. Again, we’re talking about virtual rounding errors that are likely more important to the generous client’s advisors than the client themselves (see aforementioned U.S. Trust Study).
Keep It Simple
To paraphrase legendary football coach Vince Lombardi: “People are always going to try to find things that aren’t there. It all comes down to basic blocking and tackling.” My advice: Keep it simple. Help clients maintain family values by supporting their favorite causes and organizations in all economic and tax climates. You owe it to yourself and your clients to get fluent in the language of giving, or find a fellow professional with whom you can team up (clients won’t mind).
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