Over the past several weeks, NTO has received multiple inquiries regarding the impact of the One Big Beautiful Bill Act (OBBBA) on charitable contribution carryovers.
The Two Most Common Questions on Charitable Contribution Carryovers
- If an individual has excess contributions being carried over from 2025 to 2026, are those contribution carryovers subject to the new .5% of AGI threshold effective starting in 2026?
- Can you please explain the interplay between the new .5% AGI threshold and contributions carryovers?
Although the IRS has not issued any guidance so far on these issues, NTO’s current interpretation of the application of the new provision is as follows.
Application of the new .5% AGI Threshold to Contributions Carryovers from 2025 to 2026
Starting in 2026, individuals who itemize their deductions will face a new hurdle regarding their ability to deduct charitable contributions. Their contributions will be subject to a non-deductible “floor” amount equal to .5% (1/2 of 1%) of their adjusted gross income (AGI) under §170(b)(1)(I), similar to the 7.5% of AGI floor for medical expense deductions.
For example, during 2026 an individual makes $10,000 in charitable contributions. Their AGI is $350,000. Of the $10,000 in contributions made, only $8,250 is deductible, because $1,750 (.5% of $350,000) is not deductible due to the new .5% of AGI floor.
With regard to whether or not charitable contribution carryovers to 2026 from 2025 are subject to the .5% floor, §170(b)(1)(I) indicates that they are, as it states that “Any charitable contribution otherwise allowable (without regard to this subparagraph) as a deduction under this section shall be allowed only to the extent that the aggregate of such contributions exceeds 0.5 percent of the taxpayer’s [AGI] for the taxable year.” Since a contribution carryover from 2025 to 2026 is included in “any contribution otherwise allowable as a deduction under [§170],” it appears to be subject to the limitation. There is no language in §170 which clearly provides otherwise.
We have seen one tax publication (CCH’s federal tax handbook) and certain artificial intelligence (AI) platforms indicate that contribution carryovers to 2026 are not subject to the threshold. CCH cites §170(d)(1)(C) for its position, but a careful reading of that Code section has led NTO to believe that CCH’s guidance may be erroneous, at least unless and until the IRS issues formal guidance providing that carryovers from 2025 to 2026 are not affected by the new floor. Where AI sources state that contribution carryovers to 2026 are not subject to the new floor, they typically source online articles published by law firms and accounting firms, but those articles do not provide citations for their conclusions.
Since the statute appears to provide that carryovers from 2025 to 2026 are subject to the new .5% AGI floor, but a national tax research content provider and certain law and accounting firms have publicized that they are not, NTO’s position on this issue is that they are subject to the floor in 2026 unless and until the IRS provides formal guidance to the contrary.
The .5% AGI Threshold’s Effect on Post-2026 Contribution Carryovers
In enacting the new .5% AGI floor in §170(b)(1)(I), it appears that Congress did not want to be too harsh on charitable-minded taxpayers, so it built in a relief provision for individuals who make excess contributions in 2026 and later years, effectively insuring that their excess contributions are only hit with the new .5% AGI floor one time.
The historic 20%, 30%, 50% and 60% of AGI limitations on excess charitable contributions have been left in place. Under §170(b)(1)(I)(i-vi), the .5% of AGI disallowance against them is applied in the following order:
- 20% for appreciated property contributed to non-public charities
- 30% for long-term gain property contributed to public charities
- 30% for cash and other non-capital gain property contributed to non-public charities
- 50% of AGI for qualified conservation contributions
- 50% for non-appreciated property to public charities and
- 60% for cash contributions to public charities.
For instance, an individual with an AGI of $500,000 donates appreciated stock worth $165,000 and $10,000 in cash to a charity. First, the 30% of AGI limitation is applied before the .5% of AGI floor, so their net deduction on their 2026 tax return for the gift of stock is $147,500 calculated as follows:
|
AGI: |
$500,000 | ||
| Value of stock donated: | $165,000 | ||
| 30% of AGI: | $150,000 | ||
| Allowable Donation Before .5% AGI Floor: | $150,000 | ||
| .5% AGI Floor: | ($2,500) | ||
| Net allowable deduction for shares: | $147,500 | ||
Their $10,000 gift of cash is allowed without limitation as the entirety of the .5% AGI floor limitation was used first against their 30% limited donation.
Their excess 30% contribution is $15,000. However, because the taxpayer in this case has an excess 30% contribution for 2026, the amount carried-forward to 2027 is increased by the amount of their .5% AGI floor disallowed amount for the year (§170(d)(1)(C)). Accordingly, their contribution carryover to 2027 is as follows:
|
Excess 2026 30% Contributions: |
$15,000: | ||
| .5% Floor applicable to 30% Contributions | $2,500 | ||
| 30% Contribution Carryover to 2027: | $17,500 | ||
Note that the increase in the carryover to 2027 only happens if and when the taxpayer otherwise has an excess contribution for the year. This is a “cliff” threshold situation, so if their 2026 AGI was $549,995 and they had $165,000 in allowable 30% deductions before the .5% AGI floor, their carryover to 2027 would be $2,751 ($1 excess 30% contribution + $2,750 .5% AGI floor). However, if their AGI was $550,000 they would not have any excess 30% contributions for the year and none of their 2026 .5% AGI floor would be eligible for carryover to 2027.
Accordingly, taxpayers who donate substantial sums to charity may want to plan to donate amounts sufficient enough to create a charitable contribution carryover in 2026 and later years as doing so allows them to carry the otherwise .5% of AGI disallowed amount over with it.
Summarizing the Calculation of Charitable Contribution Carryovers
In summary, for purposes of calculating charitable contribution carryovers from 2026 to later years, the following steps are taken:
- Apply the various AGI limits to the types of contributions made during the year, including contributions coming forward from previous years.
- Reduce the otherwise allowable deduction by .5% of the taxpayer’s AGI
- If there are no excess contributions for the year as determined in Step 1, stop here, there are no carryovers to the subsequent year. If, however, there are excess contributions for the year, increase carryover amount by the amount disallowed in Step 2.
Should you have any questions on the above topics, please contact CBIZ.
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