Above The Line and Under the Radar
How well do you really understand the charitable deduction?
I’m celebrating Tax Day 2025 with an exploration of your favorite subject and mine: the charitable deduction. I’d understand if pouring through the IRS tax code isn’t exactly your favorite pastime, so I hope to provide a bit of a public service by demystifying obtuse IRS gobbledygook. No matter what side of the donation equation you’re on – and many of us are both donors and recipients, depending on the circumstance – if you’re working in the nonprofit cinema ecosystem, the charitable deduction is always there, even if lurking in the shadows. So let’s shine a little light on it, shall we?
Before I go any further, all the caveats apply. I am not a CPA or a tax attorney. I met my college math requirement by taking Math As a Liberal Art during my Freshman year at Occidental College twentyfivehrumphteen years ago. Perhaps this makes me particularly well-suited to explain this; if I, a proud holder of a BA in English and Comparative Literature1, understand it then maybe you will too. And if you already do: you get a gold star! 🌟
The Story So Far…
A person’s relationship with the charitable deduction is based on their tax situation. Up until 2026 – more on that in a minute – the 90% of taxpayers (according to 2022 data) who take the standard deduction could not deduct charitable donations of any kind. Put another way, for the vast majority of Americans, there was no financial benefit whatsoever for donating to a 501c3 nonprofit. People still do, of course (as of 2020, about 47% of households), but that percentage has been steadily declining for the past 20+ years.
The other 10%, those who do itemize their taxes because deductions exceed the standard for that year, calculate their federal2 tax savings by multiplying the total allowed charitable donation amount by their marginal tax rate. For example, if a hypothetical taxpayer with a marginal tax rate of 35% donated $10,000 in a year, their charitable donation would reduce their tax bill by $3,500, or $10,000 × 0.35. The advantage grows for people in higher tax brackets who also donate big bucks. In a simplified example, someone earning $5,000,000 of taxable income could owe 35% in taxes, or $1,750,000. If they made $1,000,000 in charitable donations that year and could deduct the full amount, that donation would reduce their taxes by 35% of $1,000,000, or $350,000, lowering their tax bill from $1,750,000 to $1,400,000. That’s not nothin’.
Timing is what makes things interesting. These taxpayers can claim up to 60% of adjusted gross income for cash, and 30% for non-cash, donations in a single year. So it’s a common practice to sync up a bunch of charitable giving the same year as an anticipated wealth event (AKA a bigger tax bill year), in order to max out the deduction limits and thereby reduce an overall tax bill by as much as possible. But just because a person can maximize their deductions, does not mean they will. Every taxpayer falls on their own point along what I’ll call the Spectrum of Tax Avoidance, or the tolerance level for the gymnastics required to keep money out of local, state, and federal coffers. There’s another Spectrum at play here: one of Motivation. On one end is the person who is chiefly motivated by the application of the charitable deduction to maximally benefit their finances, and the giving is the byproduct. On the other is the person who has more money they can spend in one lifetime, wants to move it into the world to do some good, and organizes their financial (and tax) plan accordingly. I suspect everyone falls somewhere in between, and maybe some are so divorced from their finances they haven’t given it a whole lot of thought.
What’s New in 2026
The OBBBA, signed into law on July 4, 2025, introduced three changes to the charitable deduction beginning in 2026 for individual3 taxpayers. For now, let’s stick with “The Itemizers” (roughly the top 10% of taxpayers). Starting in 2026, there is a new 0.5% of AGI floor for taxpayers who itemize, which creates a minimum threshold before charitable giving becomes tax‑deductible. In plain language, the first 0.5% of your AGI given to charity each year does not reduce your taxes.
For example, our friend with $5,000,000 of AGI and a 35% marginal tax rate who donated $1,000,000 in cash to charity in 2026:
Calculates 0.5% of $5,000,000 = $25,000
Subtracts that $25,000 floor from the $1,000,000 in gifts, leaving $975,000 that counts towards the deduction
Multiplies $975,000 by their 35% marginal tax rate = $341,250 of tax savings.
In 2025, before the floor applied, our friend’s donation reduced their taxes by $350,000, so this new rule increases their tax bill by $8,750. Put differently, in 2025 they effectively “paid” $650,000 to give $1,000,000 to charity, but in 2026, because of the new 0.5% floor, the same $1,000,000 gift effectively costs $658,750.
Taxpayers in the highest nominal income bracket of 37% are facing an additional restriction in 2026: itemized deductions, including charitable donations, are capped at 35% of income. So where previously this taxpayer could use a multiplier of 37% to calculate their charitable deduction, if that was their marginal tax rate, they are now limited to 35%. While this impacts a relatively small percentage of overall Americans, these folks account for over half of annual charitable giving and tend to be more prone to adjust their giving in response to policy changes.
Returning now to the Non-Itemizers, or the remaining 90% of taxpayers. Starting this year they will be able to deduct charitable donations: Up to $1,000 if single, or $2,000 if married filing jointly. This is on top of the standard deduction amount ($16,100 and $32,200, respectively); the filmmakers in the audience will appreciate that this is referred to as “above the line.” Taxpayer savings of this new policy are estimated in the couple of hundred dollars per person, and could lead to a significant uptick in smaller-dollar donations from a wider spectrum of taxpayers.
Still with me?
I have a confession to make. I had a career for many years in the nonprofit sector and made charitable donations from a DAF I opened in 2006 with no clue how the charitable deduction worked. If you relate to that statement, I’m here for you (and your secret’s safe with me). While I sympathize with your situation, I also believe that knowledge is power; and where knowledge gaps exist, erroneous assumptions often step in to fill them. I hope you have learned something you once assumed was irrelevant or just too confusing to bother with. And that this knowledge makes you feel more confident and empowered to ask questions, facilitate more transparent conversations, and make informed decisions. If it leads to more support flowing into the nonprofit cinema ecosystem, that’s a win.
At the macro level, smaller-dollar donations are expected to increase, while larger-dollar donations could decrease. The two are roughly calculated to offset each other, so the net effect will be a broader base of givers making up the $550-$560 billion expected in total charitable giving in 20264. That strikes me as a good thing in a healthy democracy. Let’s also not forget the estimated $2 trillion currently parked in foundations and DAFs, and with the projected Great Wealth Transfer that number could grow to $18 trillion by 2045. I know it comes as cold comfort to a nonprofit leader or independent filmmaker who suddenly loses a key donor as a result of policy changes, but at the risk of sounding Pollyannish, I look at these numbers and see a ton of money sloshing around out there, just waiting to be put to good use.
What’s your relationship with the charitable deduction, if you have one? How are you thinking about responding to the policy changes this year? If reading this sparked thoughts or questions for you, share them in the comments or send to hello@thebacklight.org.
And, not for nothing, a Masters in Education with an Emphasis in Teaching from Mills College. Which I’m also quite proud of but is also pretty irrelevant when it comes to this topic!
State taxes vary so I’m just sticking to federal here.
A fourth change, impacting corporations, is not discussed here for simplicity’s sake.
Source: The Philanthropy Outlook: Estimating Effects on Charitable Giving from the One Big Beautiful Bill. This is a great overview of all of the changes to charitable tax policy in the OBBBA worth reading to get a full picture.