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Retired Military Finances 201: Charitable Giving Tax Treatment is Changing Thumbnail

Retired Military Finances 201: Charitable Giving Tax Treatment is Changing

Taxes

The tax treatment of contributions to charity used to be relatively simple. If you couldn't itemize you couldn't take a deduction (except during COVID). If you itemized, you got the deduction. That was pretty much it. There were/are upper limits on how much you can deduct, based on AGI, but for most of us that wasn't/isn't a big deal. That's about to change (in 2026) due to the One Big Beautiful Bill Act.

New Floor for Deductions

Starting in 2026, if you itemize, you can only deduct the charitable contributions that exceed 0.5% of your Adjusted Gross Income (AGI). That equates to $500 per $100,000 of AGI. If your AGI is $250,000, as an example, the first $1,250 of charitable contributions is not deductible. And just to complicate things there is an ordering rule on how the floor is applied. The reduction applies to contributions in the following order:

  1. Capital gain property contributed to non-public charities
  2. Capital gain property contributed to public charities using fair market value
  3. Cash contributions to non-public charities
  4. Qualified conservation contributions
  5. Capital gain property contributed to public charities using cost basis
  6. Cash contributions to public charities

To be honest, I don't know that the ordering rules will make much difference for most people, but I think it is worth knowing.

It is currently unclear to me whether the floor applies to the non-cash contributions (like clothes) you make to Goodwill and other charities

Non-itemized Charitable Contribution Deduction

For taxpayers that don't itemize, you now have the ability to deduct charitable contributions. For single taxpayers the maximum deduction is $1,000 and for joint filers the limit is $2,000. This deduction is not subject to the 0.5% floor but only cash contributions are eligible for the deduction.

These contributions can't be made to a donor-advised fund (DAF) or to Section 509(a)(3) "supporting organizations"

Cap on Deductions

Currently if you're in the 24% tax bracket, as an example, a dollar of contributions reduces your taxes by 24 cents. Again, starting in 2026, that math will change for taxpayers in the 37% bracket. Their tax bill will go to 35 cents for every dollar contributed (instead of 37%).

This will apply to a relatively small number of taxpayers. Specifically, single taxpayers with taxable income of $626,350 or more and joint filers with taxable income of $751,600 and higher.

What this Makes Me Think About

If you have high income, 2025 is the year to "gross-up" your charitable contributions. Let's say you're a joint filer in the 37% tax bracket your AGI equals $850,000 and your taxable income is $770,000. You contributed $40,000 to charity.

If you make that contribution in 2025, you'll save $14,800 in taxes.

If you make the same contribution in 2026, you'll save a bit less.

  • $4,250 will not be deductible ($850,000 x 0.5%)
  • You'll save $12,512 in taxes (($850,000 - $4,250) x 35%)
  • That's a $2,278 tax increase just because you waited until January

If you haven't thought about a Donor Advised Fund (DAF), this could be the year to do it

Another thing I'm thinking about is people who make charitable contributions, but just barely exceed the standard deduction and itemize. Let's look at the following situation:

  • AGI = $200,000
  • Charitable deductions equal $5,000 (all cash) reduced to $4,500 ($200,000 x 0.5%)
  • Total Itemized Deductions equal $33,000, including the charitable contributions
  • Standard Deduction is $31,500 (actual 2025 amount)

If the taxpayer itemizes, he or she will have $33,000 in deductions. If he or she, instead, takes the standard deduction the total deduction will be $33,500 ($31,500 standard deduction + $2,000 new charitable deduction)

The last thing I'm thinking of is Qualified Charitable Distributions (QCD). All the rules above make a QCD even more attractive for those 70 1/2 or older. The 0.5% reduction and the 35% limit don't apply as the QCD never shows up as income and you don't take a deduction.

Military Finances are Different

The new charitable deduction rules apply to all finances. But as an Active Duty or Retired Servicemember your finances are different. For instance, your allowances while on Active Duty or your VA Disability Compensation can be used to calculate the sales tax deduction. If your financial advisor or planner doesn't routinely work with Active and Retired Military Members, he or she won't even think about this. That's why we think Active and Retired Senior Military Officers and NCOs should work with a firm that specializes in working with military members. If you'd like to find out how we work with people just like you, use the button below to schedule a free, initial consultation.

If you found this article useful, you might like the following blog posts:

Military Finances 101: Getting Charitable Ducks in a Row


Retiring from the Military? Say Hello to the NIIT and Medicare Surtax


3 Mistakes Military Retirees Make on Their Tax Returns


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