In our last blog post, we outlined the changes for federal taxes based on the One Big Beautiful Bill Act (OBBBA) passed on July 2, 2025. In this blog post, we’re taking a deeper dive on how high-income residents in certain states—most notably California—can maximize their charitable giving. There weren’t any changes to California tax laws this year, but OBBBA prompted us to take a closer look at California’s itemized deduction limitations for high earners.

Bear with us because we are going to get into some math! But we promise it’s worth it. Between the existing California tax laws and federal OBBBA changes, if you are a California individual earning over $250,000 or a California couple earning over $500,000, and you are at least moderately charitably inclined, you may be able to claim a much higher tax deduction by accelerating charitable giving into 2025.

We’ll note later as well: there are other states with similar structures on itemized deductions where a similar strategy may be relevant, including New York, Hawaii, Minnesota, and Virginia.

Background

First, California has standard deductions like the federal system:

·        Single or Married Filing Separately: $5,706

·        Head of Household, Married Filing Jointly: $11,412

You can itemize if your deductions are over the standard deduction limit. For California, itemized deductions include mortgage interest, investment interest, medical expenses, gambling losses up to winnings, alimony for divorces before 2019, job expenses, and certain miscellaneous deductions. (Note these don’t all conform with federal itemized deductions.)

California tax law limits your itemized deductions if your federal Adjusted Gross Income (AGI) is over these thresholds for 2025[1]:

·        Single or Married Filing Separately: $252,203

·        Head of Household: $378,310

·        Married Filing Jointly: $504,411

Over these thresholds, itemized deductions are limited by the lesser of:

·        6% of AGI over the above thresholds, OR

·        80% of total itemized deductions

For example, a couple with an AGI of $1,000,000 and itemized deductions of $50,000 will have their itemized deductions limited by the lesser of:

·        $1,000,000 - $504,411 threshold x 6% = $29,735.34 OR

·        $50,000 x 80% = $40,000

The “6% limitation” of $29,735.34 is the lesser number, so they will be able to itemize $50,000 - $29,735.34 = $20,264.66.

What happens as a result is up to a certain deduction breakeven, the “80% limitation” will apply. When deductions are higher than the breakeven, the “6% limitation,” which is less, will apply. The breakeven can be represented by this formula:

(Federal AGI – CA filing threshold) x 0.06 / 0.8 = Breakeven

Our same couple earning $1,000,000: ($1,000,000 - $504,411) x 0.06 / 0.8 = $37,169.18 Breakeven

An individual earning $400,000: ($400,000 - $252,203) x 0.06 / 0.8 = $7,094.26 Breakeven

The Tax Strategy

What this structure shows—and why it’s so interesting (or exciting, if you are tax nerds like us)—is that the more deductions you have over the breakeven, the higher the rate you can deduct them, which ultimately lowers your effective tax rate. Here’s how this works:

For deductions below the breakeven, you will only be able to deduct 20% of the total (the 80% limitation). (Again, assuming you are over the income thresholds above.)

For deductions over the breakeven, the 6% limitation will apply. Because the 6% limitation is a function of income, not the amount of deductions, this limitation is static and will not increase as deductions go higher. This means you can deduct 100% or dollar-for-dollar the amount over the breakeven, which incrementally will lower your overall effective tax rate.

So, the more deductions you have over the breakeven, the “better.” But people normally don’t want deductions to be higher (because perhaps you’ve paid more in interest or had higher medical payments, for example). The exception is charitable giving.

If you normally donate a larger amount to charity (including tithing)—likely about 2-3% or higher of your gross income—OR you normally have itemized deductions that are at least this much, you may benefit on the California tax side from “lumping” your charitable giving so that more of your charitable giving is above this breakeven. For example, instead of giving $10,000 every year, you give $20,000 every other year. If you don’t want to give to the actual charity every other year, you can also achieve this by donating to something like a donor-advised fund (DAF) every other year and then distributing to charity from the DAF every year.

Because of the federal OBBBA changes that will limit itemized charitable giving starting in 2026 (which we detailed in our previous blog post), you may consider in fact lumping several years of charitable giving into 2025, both for the federal benefit and the California benefit.

Other states: Note that other states have a similar structure on limiting itemized deductions with different thresholds or percentages for calculating the phase-down. Those states currently include Hawaii, Minnesota, New York, and Virginia.[2] Depending on your situation in those states, this tax strategy could also be applicable.

The federal tax system also used to have a similar limitation on total itemized deductions for high earners—the Pease limitation—but it was suspended under the 2017 Tax Cuts and Jobs Act and permanently eliminated under OBBBA.

Here are some examples:

Example 1. A couple has an AGI of $2M, $25,000 of mortgage interest, and they normally give $50,000 to charity every year (2.5% of AGI).

Their breakeven would be $112,169.18 using the formula above. If they have itemized deductions above this threshold, they start being able to deduct those dollar-for-dollar against their income. Below, they can only deduct up to 20% of their total itemized deductions.

If they stick with their normal $50,000 this year, their total California itemized deductions will be $75,000 ($50,000 charitable + $25,000 mortgage interest). They’re not anywhere close to their breakeven, so they’ll only be able to deduct 20% or $15,000 on their California return. (Note this is still above the CA standard deduction.)

If they donate $100,000 this year – perhaps for this year and planning for next year, their total California itemized deductions will be $125,000,and the “6% limitation” will start to apply since they’re over the threshold. They’ll be able to deduct $35,265, or 28% of their total itemized deductions.

If they donate $250,000 this year – planning for this year and the next four years – their total California itemized deductions will be $275,000, and they’ll be able to deduct $185,265 or 67% of their total itemized deductions in 2025! Plus, they will take the standard deduction for the next four years. If they just donated $50,000 five years in row, they’d only be able to deduct $75,000 total on their California returns over those five years.

By accelerating the charitable donations—again, this may be most effective by using a DAF—they are able to deduct much more of their charitable donations than if they donated year by year.

Add on top that starting in 2026, they would lose 0.5% of their $50,000 annual charitable deduction at the federal level, so they could only deduct $49,750 on their federal return per year. By spreading donations over five years from 2025 through 2029, they’ll lose $1,000 of deductions on their federal return in addition to the loss of deduction on their California return.

Example 2. An individual has an AGI of $400,000, $10,000 of mortgage interest, and they normally donate $15,000 per year (3.75% of AGI).

Their breakeven is $11,084. If they have deductions above the breakeven, they can deduct those at a 100% rate.

With their typical mortgage interest and charitable donations, they’re already above the breakeven: $25,000 of total itemized deductions. They’ll be able to deduct $15,985 on their California return, or 64% of their total deductions. That’s already pretty good!

But, if they frontload five years of charitable giving ($75,000) into 2025, plus $10,000 of mortgage interest, they’ll have $85,000 of total itemized deductions. They’ll be able to deduct $75,985 on their California return, or 89% of their total deductions. Plus, the full federal deduction.

Conclusion

Analyzing tax strategy is a highly personal situation that depends on current tax laws, both at the federal and state level, as well as your financial structures and goals. This charitable strategy emphasizes why it has been so important for us to analyze every client’s tax situation thoroughly to make sure we’re identifying what makes the most sense. With the OBBBA changes, accelerating charitable giving has already been incentivized, and with tax laws in certain key states like California, there may be even more incentive for us to find charitable opportunities for our clients.

FAQs

Q: What is OBBBA and when was it passed?

A: The One Big Beautiful Bill Act (OBBBA) was passed on July 2, 2025, bringing sweeping changes to tax laws, including charitable giving rules.

Q: How does the new 0.5% income floor in OBBBA affect charitable deductions?

A: Beginning in 2026, itemizers must exceed 0.5% of Adjusted Gross Income (AGI) before charitable gifts are deductible. This reduces the federal tax benefit of large donations, and in some cases, can eliminate the ability to deduct charitable donations, especially for taxpayers with high income.

Q: How does California limit itemized deductions?

A: California limits itemized deductions for individuals and couples with income over certain thresholds. Over those thresholds, you are limited to the lesser of 80% of total itemized deductions OR 6% of the amount of income over those certain thresholds. As a result, at certain levels of itemized deductions, the 80% limitation will apply and at higher levels of deductions, the 6% limitation will apply.

Q: What are the benefits under California tax law of increasing charitable giving?

A: If you over the threshold where itemized deductions are limited in California, increasing charitable giving/deductions above a breakeven between the 80% limitation and the 6% limitation will allow you to deduct 100% of the charitable giving over the breakeven. The breakeven is represented by the equation: (Federal AGI – CA filing threshold) x 0.06 / 0.8 = Breakeven

Q: How can you increase charitable giving?

A: Lumping or front loading charitable giving for several years, potentially by donating funds to a Donor Advised Fund (DAF) can allow you to donate larger amounts at once without having to make decisions on giving funds to charity at the same time. You can decide in later years to donate from the DAF to charity.

[1] https://www.vitallaw.com/news/california-corporate-personal-income-taxes-2025-rate-schedules-filing-thresholds-other-adjusted-figures-released/std01006b3a454d3e4d08a9ac7ab67a6f63d0

[2] https://itep.org/state-itemized-deductions-surveying-the-landscape-exploring-reforms/#limitations

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