Category Archives: Tax Planning

Charitable Deduction, Tax Planning

Some Changes to Charitable Giving with the New Tax Law

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The One Big Beautiful Bill Act of 2025 (OBBBA) made some changes to the charitable deduction.

Charitable Deduction for Non-Itemizers or People Who Take the Standard Deduction

Beginning in 2026, individuals who do not itemize deductions may claim a cash gift deduction of up to $1,000 for single filers and $2,000 for married filing joint filers. Individuals who take the standard deduction, now qualify for a charitable deduction.

If Itemize, Subject to 0.5% AGI Floor on Charitable Deductions

Beginning in 2026, individuals who itemize, are subject to a  0.5% adjusted gross income (AGI) floor.  That is, only charitable contributions in excess of 0.5% of your adjusted gross income (AGI) are deductible.  For example, if your AGI is $75,000, only charitable gifts that exceed $375 will qualify as a deduction. 

Ceiling or Cap on Itemized Deductions for High-Income Taxpayers

For those high-income individuals in the top 37% tax bracket, the tax benefit from all itemized deductions, not just charitable contributions, will be capped at a 35% tax rate. The value of itemized deductions for those in the highest tax bracket will be reduced to 35% of the deduction amount, down from the current 37%, The tax benefits received will decrease from 37 cents per dollar donated to 35 cents per dollar donated.

Planning Strategies

Timing of Contributions

Make Contributions in 2025

For planning purposes, it may be more beneficial for taxpayers who itemize to make contributions in 2025 when there is no floor in place, especially if a large donation is considered. Individuals who itemize and high income taxpayers may want to give more in 2025, to avoid the new floor and cap/reductions to the charitable deductions that start in 2026.

Going forward, it may be beneficial for taxpayers to consider making contributions in a year when AGI is lower, so that the floor amount is lower.

Charitable Bunching Strategy

This is a plan to make several years of donations in a single tax year. “Bunching” donations, making larger contributions in one year, to maximize the deductions under the new tax rules. 

Donor-advised funds (DAFs)

DAFs provide a way to contribute cash, stock, or other assets to get an immediate tax benefit in the year of funding. The funds contributed are invested and can grow tax-free. The donor can choose how they are invested and when the money goes to charities, immediately or over time.

Qualified Charitable Distributions (QCDs)

For clients age 70½ and over, qualified charitable distributions (QCDs) provide a way to donate to charity that avoids the new deductibility floor and ceiling. Generally, QCDs are donations to charity directly from an individual retirement account (IRA). QCDs can have benefits, especially for taxpayers who have required minimum distributions (RMDs).

If you have an individual retirement account (IRA) and are over the required minimum distribution age, consider qualified charitable distributions (QCDs). A QCD lets you transfer up to $100,000 per year directly from your IRA to a qualified charity without having to include the distribution in taxable income. It also counts toward your Required Minimum Distribution. If you do not itemize because the standard deduction is better, a QCD is especially attractive. And for those who itemize, it sidesteps the impacts of the 0.5% AGI floor and the 35% cap on tax savings.

529 Plan, Education, Income Tax Deduction, Massachusetts, Tax Planning

Massachusetts Has State Income Tax Deduction for Contributing to MA 529 Plan & Prepaid Tuition Program (Effective 1/1/2017)

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Starting in 2017, residents of Massachusetts can deduct contributions to a Massachusetts 529 college savings plan or a prepaid tuition program, up to $1,000 per individual or $2,000 per married couple filing jointly. This tax benefit will be available to taxpayers through the 2021 tax year, when the deduction is scheduled to expire.

Massachusetts has two college savings plans, a 529 college savings plan and a pre-paid tuition plan. Both plans are eligible for this new income tax deduction.

MEFA U.Fund College Investing 529 Plan

Massachusetts’ U. Fund College Investing Plan, 529 Plan, is managed by Fidelity. The Massachusetts Educational Financing Authority (MEFA) U.Fund plan receives pretty good ratings by both residents & non-residents according to Savingforcollege.com. It features three age-based options; one using Fidelity mutual funds; one using Fidelity index mutual funds; and a third multi-firm option with portfolios that invest in funds offered by several different companies. The plans also offer 11 static options, and one option that invest in an interest-bearing deposit account.

Massachusetts U.Plan Prepaid College Tuition Plan

Massachusetts offers the U.Plan Prepaid College Tuition Plan, which serves the same purpose as a prepaid tuition 529 plan. Participants buy tuition certificates that lock in tuition and mandatory fees at current rates. Earnings on the bonds that back the certificates are tax free. Prepaid tuition 529 plans typically have a limited group of participating schools, and the U.Plan can only be used at one of approximately 80 Massachusetts colleges or universities. Both state and non-state residents can participate. Contributions to the U.Plan are eligible for these new Massachusetts income tax deductions.

529 Plans

Earnings in a 529 plan grow free of tax charges, which is a major tax benefit. When you withdraw earnings for eligible educational expenses, you do not pay state or federal income taxes on the withdrawal. For Massachusetts’ U.Fund plan, eligible expenses include tuition, fees, room and board, books and other necessary expenses. Earnings from 529 accounts are exempt from federal and Massachusetts taxes, as long as the money is used for qualified education expenses, such as tuition, fees, books, as well as room and board. If you withdraw funds for non-qualifying expenses, then you have to pay income taxes on earnings and an additional 10-percent tax penalty.

Massachusetts residents have benefitted from the tax-deferred growth offered by the 529 college savings plans and now can also get an income tax deduction in years when a contribution to a Massachusetts 529 plan is made. Taxpayers who contribute to a MEFA U.Fund 529 college savings plan can deduct up to $1,000 for single tax payers, heads of household and married individuals filing separately and $2,000 for married couples filing a joint return.

Consider Funding or Contributing To a MA 529 Plan

Prior to 2017, MA did not have a deduction or tax benefit for MA residents using the MA plans, so people shopped other states for 529 plans. If you are a Massachusetts resident and currently have a 529 plan from another state, you may want to consider establishing and contributing to a MA 529 plan in 2017 in order to receive this tax deduction.

If you are a Massachusetts resident and currently paying for higher education, you may want to contribute to a MA 529 plan in order to receive the income tax deduction because withdrawals from the 529 plan can be taken at any time, as long as they are used for qualified higher education expenses (such as, tuition, room and board, books, and computer equipment).

However, any non-qualified distributions from a 529 plan, unless due to the beneficiary’s death, disability or receipt of a scholarship, will result in “recapture of the deduction,” in addition to a 10% federal penalty and ordinary income taxes on the earnings, which results when the plan is not used for qualified higher education costs. Make sure you use any 529 plan distributions for qualified educational expenses, so you do not lose the tax benefits.