After the passage of the budget reconciliation bill, HR 1, in July 2025, those of us in the prospect research field (and the greater nonprofit field) have thought about how this bill will impact charitable giving. Here at DAFinitive®, we are particularly interested in how it might impact donor advised funds.
First, by way of background, here are some notable changes from the reconciliation bill:
- A permanent universal charitable deduction of $1,000 for individuals and $2,000 for joint filers. This can be combined with a standard deduction. This does not apply to
non-cash gifts. - SALT (state and local taxes) deduction cap has risen to $40,000 and phases out once a single taxpayer’s income hits $500K or $1M for joint filers.
- Senior taxpayers can claim an additional $6,000 each year; applies to single filers making less than $75K and joint files making less than $150K.
- Gifts to private foundations or DAFs do not qualify for the universal charitable deduction.
- The bill increases the standard deduction: $15,750 for individuals and $31,500 for joint filers.
- Individual donors lose charitable deductions for any donations below the first .05% of their annual income and their deductions are capped at 35% of their annual income. This does not apply to qualified charitable gifts (from IRAs).
- C-corporations (publicly traded companies) can only deduct contributions that exceed 1% of their annual income.
- For private colleges and universities with more than 3,000 tuition-paying students, taxes on endowments will now range from 1.4% to 8%, depending on the number of students and the size of the endowment.
For a more detailed look on what the final bill includes, The Council of Nonprofits, created a comprehensive chart.
Now that we know what changes include, let’s look at their potential impact on the donor advised funds. In some ways, it remains to be seen but that hasn’t stopped many in the industry from offering their opinion:
Russell James, a professor of charitable financial planning at Texas Tech University, is generally critical of the changes, positing that they further discourage itemized giving and encourages filers to take the standard deduction if their gifts are lower.
Taking a slightly different view, Patrick Schmidt, co-chief executive officer of Freewill noted in their recent webinar, that filers in high-tax states like California, New Jersey and New York might begin to itemize gain after the SALT deduction goes into effect. Schmidt believes that the permanent charitable giving deduction might even encourage small-dollar donors to give now that it can be deducted from their taxes, though once they hit the $1,000 cap it might deter them from giving more.
James, however, also notes that there could be benefits for those who choose a “bunching” giving strategy. He gave the following example of why bunching can best benefit a donor, especially ones with DAFs:
“[A donor] give[s] $40,000 in year one and $0 in years two, three, and four. In year one they deduct $40,000. That’s $25,000 more than the $15,000 standard deduction. In years two, three, and four they take the standard deduction. The taxpayer gets an extra $25,000 in deductions just from bunching. That’s tax smart charitable planning…but most people don’t want to stop helping their favorite charities for three years. So, they use a DAF. The $40,000 gift goes to a DAF in year one. The DAF then pays $10,000 each year for four years to the selected charities. The charities receive the same amounts at the same times, but the donor gets a bigger tax benefit.”
Interestingly, Vanguard Charitable notes that DAF donors may have the easiest transition to these new regulations because their funds are already designated for charitable donations. Yet, Vanguard suggests that the higher itemized deduction threshold, in addition to changes in estate tax law, could discourage major gift donors from maintaining current giving levels. Fidelity Charitable has also weighed in, noting that major donors may want to bump their gifts up in 2025 to avoid the 35% contribution cap.
Financial manager Greg Mech recently wrote that in this turbulent time, DAF donors should step up to meet the moment by using more of their assets to help nonprofits facing funding gaps. He noted that despite a 51% increase in DAF assets since 2020, the payout rate has held steady at almost 24%. Because the funds are already allocated, donors can quickly assist their communities and chosen causes in times of need.
Another interesting outcome of the bill could be that a shift away from private foundations means more money following into DAFs. A Business Insider article highlights that the bill includes provisions that raise the investment tax rate on private foundations, “to 10% on foundations worth $5 billion or more, to 5% for those worth between $250 and $5 billion, and to 2.8% for those worth between $50 million and $250 million could significantly increase giving. It wouldn’t change for foundations worth less than $50 million.”
Dan Heist, a professor at Brigham Young University and no stranger to readers of DAFinitively Speaking, agrees. He was quoted in the Business Insider article as saying: “I definitely see a trend away from private foundations” and Brian Mittendorf, a professor at Ohio State University concurs that “there [was] already was a substantial amount of momentum toward donor-advised funds, and a bill like this would only magnify that.”
A recent article (note: subscription required) in the Chronicle of Philanthropy brings up an interesting point about organizations like Groundswell, that work to streamline employee giving (including through DAFs). Laura MacDonald, founder of the Benefactor Group, stated in the article that giving through workplace DAFs, attractive to ‘everyday donor,’ will become more difficult because it won’t be tax-deductible. Mitch Stein, head of Chariot, concurred. “If DAFs had not been excluded, ‘I think we could have seen an explosion in DAF usage among everyday donors.”
Yet, in that same Chronicle of Philanthropy article, Jeff Williams, co-founder of the DAF Research Collaborative, disagreed; he feels that most DAF donors are already bundling and not-itemizing their donations, leading to little impact to their giving habits.
The summary is quite simple: we don’t yet know if the reconciliation bill will inspire those of us who can give to do so, and in higher amounts, or if overall giving will contract. Only time will tell.
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Image credit: “I’m-Just-a-Bill” by maryfrancesmain is licensed under CC BY 2.0.
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