The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, solidifies and expands upon the provisions of the 2017 Tax Cuts and Jobs Act (TCJA), providing more near-term tax planning certainty for high-net-worth individuals and tax-exempt organizations.
Changes in the Tax Code Relevant to Wealth Planning
Specifically, individuals should be aware of these key provisions relating to their personal wealth planning.
Increased gift, estate and GST exemptions (IRC §§ 2010, 2631)
Effective January 1, 2026, the OBBBA permanently increases the federal estate, gift, and generation-skipping transfer (GST) tax exemption amounts to $15 million for individuals ($30 million for married couples), subject to adjustments for inflation from 2026 forward. This provision eliminates the sunset clause in the TCJA and replaces the scheduled reversion to approximately $7 million per individual / $14 million per couple. This is good news for high-net-worth individuals and removes the pressure to complete large gifts by the end of 2025 (although doing so may still make good sense for many).
Although the increased exemptions do not have a set expiration date and are advertised as “permanent,” Congress still has the authority to change these provisions in the coming years.
The OBBBA also maintains the TCJA’s income tax structure, with the top tax rate remaining at 37%, and it made no changes to the maximum gift, estate, and GST tax rates, which remain at 40%. There was also no change to the $60,000 exemption available to the estates of noncitizen, nonresident individuals who own U.S.-situs assets.
Charitable contributions
Two camps of individual U.S. taxpayers are impacted by the OBBBA: those who choose to list their qualifying expenses individually on their federal tax return to potentially lower their taxable income (itemizers) and those who instead opt to take the standard deduction, which is a fixed amount based on filing status that is shielded from taxes (non-itemizers). The vast majority of U.S. taxpayers are non-itemizers; only about 10% are itemizers.
Charitable contributions for non-itemizers (IRC §:170(p))
Beginning in 2026, the OBBBA permits non-itemizers to claim a charitable contribution deduction of $1,000 (single filers) / $2,000 (married filing jointly) against taxable income (not adjusted gross income (AGI)). This applies only to cash contributions to qualifying charities, not contributions of noncash property (e.g., securities). It does not include contributions to donor-advised funds, supporting organizations, or most charitable remainder trusts. Charitable contribution carryforwards also do not qualify.
For non-itemizers, the new provision represents a new tax incentive to make charitable donations. Previously, non-itemizers could not financially benefit from their donations to charity. Waiting until 2026 to make cash charitable contributions may make sense for this group, but if a noncash contribution is planned, there is no reason to wait. As with any charitable contribution, and especially for non-itemizers not in the habit of needing them, the taxpayer should make sure to collect and retain a contemporaneous written acknowledgment.
Charitable contributions for itemizers
New 0.5% floor for charitable contributions (IRC § 170(b)(1)(I))
Beginning in 2026, the OBBBA establishes a 0.5% floor for itemizers. The floor applies both to cash and noncash contributions. Specifically, itemizers must contribute at least 0.5% of their modified adjusted gross income (MAGI, which is AGI with certain deductions added back, usually equivalent to AGI) in a tax year to qualify for a charitable income tax deduction at all. Contributions disallowed by the 0.5% floor qualify for carryforward only from years in which the 0.5% limitation is exceeded.
For example, in 2026, Jim has a MAGI of $500,000 and makes charitable contributions of $25,000. The 0.5% limit = $2,500 ($500,000 x 0.5%). Jim’s itemized charitable contribution deduction is $22,500 (i.e., $25,000 less $2,500 floor). Looking forward to 2027, Jim may carry over $2,500 (since the 0.5% limit is exceeded). If Jim had made contributions of $2,500 or less he would have gotten no charitable contribution deduction in 2026 and no carryforward.
The 0.5% floor is more problematic in high-income years. Individuals should consider making planned charitable contributions in 2025 to avoid the new 0.5% floor and should also consider whether bunching contributions (i.e., by making contributions to donor-advised funds) in certain years rather than annually makes sense.
Makes charitable contribution of 60% of AGI for cash gift permanent (IRC § 170(G))
Although the 0.5% floor adds an unwanted layer of complexity and may discourage some charitable contribution planning, in better news, the OBBBA permanently extends the provision limiting cash gifts to public charities to 60% of an individual’s AGI. This provision was due to expire under the TCJA. This extension preserves a tax incentive for individuals to make larger cash donations to public charities, but note that it may be reduced in the case of noncash gifts and/or gifts to private foundations.
New overall limit on itemized deductions (IRC §§ 67(h), 68)
In addition to the 0.5% floor for charitable contributions, the OBBBA implements a new overall limit on itemized tax deductions to provide that itemized deductions otherwise allowable for a year are reduced by up to 2/37 (5.4%). This overall limitation provision replaces the former Pease limitation and is generally more favorable than the Pease limitation would have been, but it still may disincentivize large donations.
Specifically, IRC Section 68 was rewritten to disallow 2/37 of the lesser of (1) itemized deductions otherwise allowed (excluding miscellaneous deductions, which are disallowed); or (2) the amount of taxable income to which the 37% bracket applies. Therefore, the OBBBA caps the tax benefit at $.35 for each dollar of itemized deductions rather than the full $.37 per dollar previously received by taxpayers in the top income tax bracket (a 2/37 (5.4%) haircut). In other words, taxpayers in the 37% rate bracket will have a 35% cap on their itemized deductions. The income tax liability for those in the 37% income tax bracket may increase marginally beginning in 2026, but they keep 94.6% of their itemized deductions.
For example, a married couple has $1 million of taxable income and $100,000 of itemized deductions in 2026 (assuming they have already been reduced by any applicable SALT phaseout and the 0.5% charitable contribution deduction floor). The lesser of the excess amount of their income over the 37% bracket or the amount of their itemized deductions is the amount of their available itemized deductions. In 2025, the 37% bracket begins at $751,601 (2026 amounts are unknown), so the amount that the couple’s income ($1 million) exceeds the 37% bracket (roughly $250,000) is greater than their amount of itemized deductions ($100,000). So in this example, the couple’s $100,000 itemized deductions times 2/37 results in $5,400 lost and $94,600 retained.
While somewhat complex, the overall itemized deduction limitation, or 5.4% haircut, is not terribly punitive.
Application to estates and trusts (repeal of IRC § 68(e))
It appears that the new 2/37 limit on itemized deductions also applies to estates and nongrantor trusts. Under prior law, estate and trusts were specifically exempted. Although no mention of this brand-new application was included in any of the reports, the repeal of IRC Section 68(e) (which was the provision that stated the Pease limitation did not apply to estate and trusts) was included in every version of the bill.
Although 2026 brackets are not yet available, for 2025, the 37% bracket applies to trusts and estates with taxable income in excess of $15,900, which is a fraction of the threshold for individuals. For example, a trust with $370,000 of itemized deductions would lose roughly $20,000 (or 5.4%) of itemized deductions. This would apply to legal, accounting, and trustee fees, charitable deductions, etc.
The 2/37 disallowance would cause a trust or estate entirely payable to charity to pay income tax, which goes against established public policy norms. Taxpayers may consider leaving retirement assets (IRAs and 401(k)s) directly to charity (bypassing the estate or a trust), which should avoid the issue. Also, the Internal Revenue Code gives a fiduciary the option to apply deductible expenses (legal, accounting trustee fees, etc.) on the decedent’s estate tax return. Without clarification from Congress on these provisions, we will be partnering with our tax-return preparer colleagues to identify strategies to minimize the impact of these provisions on those impacted.
Enhanced 529 plans (IRC § 529)
529 plans are a type of educational savings account that offer tax-free contribution growth and withdrawals for qualified expenses. The OBBBA expands the scope of 529 plan account funds in various ways.
First, the updated provision increases the annual withdrawal limit from 529 plans for elementary and secondary education from $10,000 to $20,000 per year (beginning January 1, 2026). Previously, before the TCJA, withdrawals could only be made for college expenses, and then following the TCJA, only up to $10,000 annually for elementary or secondary public, private, or religious school tuition.
Second, the OBBBA further expands the scope of 529 plans by adding to the definition of “qualified expenses” for both K–12 and higher education. Specifically, “qualified expenses” for K–12 now include the following costs, in addition to tuition:
- Curriculum materials.
- Fees for national standardized tests.
- Books and other instructional materials.
- Dual enrolment fees.
- Online educational materials.
- Tutoring or educational classes outside the home.
- Educational therapies for students with disabilities.
For higher education, “qualified expenses” now include expenses for “postsecondary credentialing” as well, which are related to more technical, skills-based, or on-the-job training. For example, this now includes expenses for certain professional and occupational licenses and certifications (like CPA exam preparation or bar exam registration), expenses for credential and training programs listed under the Workforce Innovation and Opportunity Act (such as programs offered by trade schools and technical schools, like welding, mechanics, plumbing, cosmetology, and other trades), costs of continuing education courses necessary to maintain a credential, and other expenses for approved apprenticeship or credential programs.
Lastly, the OBBBA permanently allows the option for 529 plans to be rolled over to an ABLE account, which is a savings or investment account for qualifying individuals living with disabilities. These provisions were set to sunset at the end of this year.
The options available for 529 plan withdrawals have continued to expand over time, with the OBBBA providing even more opportunities, particularly with its new inclusion of technical, skills-based, and credentialing postsecondary education expenses. We expect these accounts to continue to be widely used by those with young children.
“Trump accounts” (IRC § 530A)
The OBBBA created “Trump accounts,” which are new tax-deferred saving accounts for minor children born in 2025 and beyond that are taxed and treated similarly to an IRA. All U.S. children born between 2025 and 2028 with a Social Security number will qualify for a one-time deposit of $1,000 from the federal government into their Trump accounts.
Individuals may contribute up to $5,000 a year (which is indexed for inflation starting in 2028) until the child turns 18. This amount is taxed when contributed, but not when later withdrawn by the child. However, earnings on the contributed amount that are later withdrawn are taxed at ordinary income rates.
Employers can make contributions of up to $2,500 toward the $5,000 annual limit per employee, and this amount is not taxed when contributed. However, both the contributed amount and its earnings are taxed when later withdrawn. Similarly, 501(c)(3) organizations and state and local governments may make tax-free contributions if made on an equal basis to a qualified class of beneficiaries, but the contributed amount and its earnings are also taxed when withdrawn.
No withdrawals may be made before the child is 18. After turning 18, the child may withdraw assets for “qualifying expenses,” which include withdrawals for purchasing a first home, for disaster recovery from a federally declared disaster, for birth and adoption expenses, and for qualified higher-education expenses. If withdrawn for a “non-qualified expense” before the child turns age 59 1/2, then the withdrawal is subject to a 10% penalty.
While smaller accounts, these are still a new savings option that new parents may be interested in, particularly if a child is born between 2025 and 2028.
Tax credit for contributions to primary and secondary school scholarship granting organizations (IRC § 25F)
One of the more significant changes of the OBBBA is that it designates a new nonrefundable federal credit of up to $1,700 (also called the “school choice tax credit”) that individual taxpayers can claim for making donations to qualified scholarship granting organizations (SGOs). This credit (which is a dollar-to-dollar reduction in tax owed) may be available for donors instead of the standard charitable contribution deduction (which instead reduces taxable income when calculating tax owed). If the tax credit exceeds a donor’s tax liability in a given year, the credit can also roll over to the next taxable year for up to five years after the credit is made available. The OBBBA did not limit the program’s cost or provide a sunset.
An SGO is a nonprofit that is exempt under IRC Section 501(c)(3), is not qualified as a private foundation, and:
- Provides scholarships to at least 10 students who do not all attend the same school (so it cannot be affiliated with a specific school).
- Allocates at least 90% of their income to the scholarships.
- Provides scholarships solely for qualified elementary or secondary education expenses (not college expenses). There are also specific requirements for what students may qualify to be scholarship recipients and how they are selected – for example, donations cannot be earmarked for a particular student.
The tax credit is subject to states electing to participate in the federal tax credit program. Each participating state can set its own tax credit amount (up to $1,700) and must determine a list of eligible SGOs in the state. The SGO tax credit will take effect in 2027, giving donors and nonprofits time to ensure they are in compliance with the regulations should their state opt in.
This groundbreaking new tax credit is the first national, federally funded private school choice program since it effectively creates a national program of publicly funded subsidies for private schools. Similar programs already exist in many states in some form, including Georgia’s Tuition Tax Credit Scholarship Program, which has provided a state income tax credit for similar donations made since 2008.
This federal credit is also significant in the fact that it is a dollar-to-dollar tax incentive for cash and in-kind contributions, meaning donors who make contributions to SGOs receive 100% of the contribution back in the form of the credit (subject to the cap). For donors contributing stock, for example, this means their contribution may permit a greater tax benefit than if the donor instead contributed their stock to a non-SGO for a charitable contribution deduction.
Changes in the Tax Code Relevant to Tax-Exempt Organizations
A number of the provisions of the OBBBA impacted tax-exempt organizations, though several of the significant anticipated changes were ultimately cut, such as the proposed tiered tax system for net investment income under IRC Section 4940 applicable to all private foundations and proposed changes to the rules on the excise tax on excess business holdings under IRC Section 4943. All exempt organizations should be aware of the new charitable deduction limits impacting individuals and corporations, as well as the new provisions impacting private universities and colleges and excess compensation:
Individual charitable contribution limits impact exempt organizations
For tax-exempt organizations that rely on the generosity of individuals, the provisions for non-itemizers are likely to be positive and increase the number of Americans who give to charity, but the limitations on itemizers are predicted to have a negative impact on overall philanthropy.
Floor for corporate charitable contribution deductions (IRC § 170(b)(2)(A))
Beginning in 2026, a corporation is only allowed to deduct charitable contributions to the extent that the total amount exceeds 1% of its taxable income. The deduction is still limited to no more than 10% of taxable income, such that only the portion of contributions between 1% and 10% of taxable income will be deductible.
Research conducted by EY in June 2025 on behalf of Independent Sector estimates that the reduction in corporate giving resulting from this law will be $4.5 billion annually.
Endowment tax on private universities (IRC § 4968)
The OBBBA updates the current excise tax on certain private universities and colleges that have endowments. Currently under the TCJA, the endowment tax stands at a flat 1.4% for all applicable institutions with over 500 students.
The institutions that are impacted by this tax are private colleges and universities with at least 3,000 tuition-paying students, of which half are located in the United States, and with a student adjusted endowment (SAE) of at least $500,000. The OBBBA shifts this tax into a tiered rate system based on each institution’s SAE:
- 1.4% for SAE of $500,000 – $750,000.
- 4% for SAE of $750,000 – $2 million.
- 8% for SAE greater than $2 million.
An institution’s SAE is equal to its total nonexempt assets divided by the number of students (including both full- and part-time students), which, in other words, is generally the size of its endowment per student.
This new tiered excise tax system was originally proposed for the tax on net investment income for all private foundations under IRC Section 4940. The proposal was then scaled back to now only apply a new tiered rate system to the endowments of a small number of private universities and colleges. Though only a relatively few institutions are impacted, this system provides for a much heavier tax on endowments and could directly impact private colleges’ and universities’ ability to provide financial aid to lower-income students.
Expanded definition of exempt organization employees subject to excise tax (IRC § 4960)
Beginning in 2026, the OBBBA expands the scope of the IRC Section 4960 excise tax on “excess” compensation paid to “covered employees” by applicable exempt organizations (and their related entities). Under current law, the 21% excise tax applies to the five highest-paid employees earning over $1 million, which is aggregated across the exempt organization and its related entities. The OBBBA expands the definition of “covered employee” to include any employee (or former employee) of any applicable exempt organization (or predecessor) who was employed during any taxable year after December 31, 2016. With this change, any employee of an applicable exempt organization that receives remuneration of more than $1 million is now considered a covered employee.
The number of individuals whose compensation could trigger the excise tax increases substantially under this new provision. The IRS is expected to issue guidance about how to apply the expanded “covered employee” definition. In the meantime, potentially impacted exempt-organization employers should review compensation records from 2017 forward to identify individuals who may now be “covered” employees and coordinate with their affiliates, foundations, and supporting organizations. Exempt-organization employers may also want to consider whether there are opportunities to change existing compensation arrangements or establish new ones that might mitigate the impact of the expanded scope of the excise tax.
Conclusion
The provisions of the OBBBA affecting wealth planning and tax-exempt organizations overall present some changes and new opportunities. We recommend that high-net-worth individuals review their existing estate plans to ensure they are positioned to fully benefit from the higher exemptions come 2026. Many provisions of the OBBBA will also impact tax-exempt organizations, both directly and indirectly.
We will continue to monitor how these new OBBBA provisions may impact personal wealth planning strategies and exempt organizations going forward.
If you have any questions, or would like additional information, please contact one of the attorneys on our Wealth Planning team or one of the attorneys on our Exempt Organizations team.
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