7 minute read
An Expensive Haircut and Shave
The One Big Beautiful Bill Act — or OBBBA — may sound charming, but for wealthy donors, it hides a not-so-beautiful surprise.
Beginning in 2026, OBBBA introduces two major tax changes that could cut into the value of your charitable deductions — a “haircut” on your gift and a “shave” on your marginal rate.
For taxpayers in the top bracket, the combined effect can be as disappointing as ordering your favorite meal and finding smaller portions at a higher price. But there’s good news: with proper planning in 2025, you can still lock in today’s full deduction and preserve your giving power.
What Is the OBBBA Haircut and Shave?
If you’re in the 37% tax bracket and regularly support charitable causes, you need to understand two key changes set to arrive in 2026.
OBBBA reduces the tax benefits of charitable giving for high earners in two ways — by trimming deductions and lowering the rate at which they’re applied.
The Haircut: A 0.5% Floor on Charitable Deductions
OBBBA creates a 50-basis-point floor — half of one percent — on charitable contributions. In simple terms, only gifts that exceed 0.5% of your adjusted gross income (AGI) will be deductible.
For example:
A charitably inclined married couple with $800,000 of AGI in 2026 faces a $4,000 haircut on their charitable deductions. If they give $25,000 to charity, only $21,000 counts as a deduction.
That’s the first cut — the haircut.
The Shave: A Reduced Marginal Benefit
The second cut is the shave.
Even though top earners will continue to pay taxes at 37%, their itemized deductions will only provide a 35% benefit.
For the same couple in our example, their $25,000 gift in 2025 would produce a $9,250 tax benefit.
But when you compare that to 2026, that same $25,000 receives a haircut of $4,000 (0.50% of $800,000), and the $21,000 gets a shaved marginal bracket of 35% for a total tax refund of $7,350, a full $1,900 less benefit.
Let us look at how this haircut and shave affect your tax benefits at various income and donation levels.
The “Bunching” Solution: Beat the OBBBA Before It Hits
There is a solution for wealthy donors serious about avoiding OBBBA's double penalty. This concept is called “bunching,” and it involves combining multiple years of charitable contributions into one year. For example, what if our married couple contributed ten years of their charitable giving to a donor-advised fund in 2025, before the haircut and shave take effect in 2026 and beyond?
Bunching would allow the couple to capture the full 37% tax deduction while avoiding the floor limitation and reduced tax benefit for the next ten years.
How It Works
Let us look at our hypothetical married couple who earns $800,000 and typically gives $25,000 annually. If they did not use bunching, through 2034, they would receive total tax benefits of $75,400. The first year of the current tax law for charitable giving provides $9,250 in savings at 37% and no haircut. However, in 2026-2034, they would receive only $7,350 annually due to the floor eliminating $4,000 of deductions and the reduced 35% benefit rate.
The donor-advised fund bunching strategy produces a different result. Contributing $250,000 to a donor-advised fund in 2025 generates an immediate $92,500 tax deduction at the full 37% rate with no floor applied. The donor then makes their usual $25,000 annual grants from the fund, maintaining their giving pattern. The total tax benefit is $92,500, representing $17,100 in additional savings from contributing under the OBBBA haircut and shave.
Beyond tax benefits, donor-advised funds offer tax-free growth potential and flexibility. Potential investment growth could provide additional charitable dollars, extending their giving capacity.
The number of years you bunch depends on what you feel comfortable with. This timing arbitrage works because OBBBA creates a clear dividing line between 2025's favorable rules and 2026's restrictions. Wealthy donors have a limited window to capture maximum benefits before new limitations take effect.
Super-Sizing Your Bunching Strategy with Appreciated Assets
To make bunching even more powerful, consider donating appreciated assets — such as stocks, real estate, or mutual funds held for more than a year — instead of cash.
By transferring appreciated investments directly to your donor-advised fund, you:
- Avoid paying capital gains tax on the appreciation
- Receive a deduction for the full fair-market value
- Create potential for tax-free growth inside the DAF
If our couple donates $250,000 in appreciated stock purchased for $100,000, they could eliminate roughly $43,200 in capital gains taxes and still claim the $92,500 deduction — saving up to $128,200 total.
Plan Now to Avoid the OBBBA Haircut and Shave
OBBBA fundamentally changes the tax landscape for charitable giving among high earners. Combining the 0.5% floor and the reduced tax benefit for itemized deductions makes traditional annual giving less tax-efficient. Bunching strategies can help preserve much of the tax benefit while maintaining your philanthropic goals.
The most important step is recognizing that your current giving strategy needs a new approach to combat the OBBA. Wealthy donors who continue giving the same amount each year after 2026 will see their tax benefits reduced substantially. Those who adapt their strategies to work within the new rules can maintain much of their current tax efficiency while continuing to support the causes they care about.
Start planning now before these changes take effect. The best strategies require advanced planning and coordination with your financial advisor.
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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