Donor-advised funds have quietly become one of the most widely used charitable giving tools in the United States, and a federal rule change that took effect on January 1, 2026 has made them worth a fresh look for households across the Sacramento region. Two provisions of the 2025 tax law reshaped how charitable contributions are deducted. The practical result is that when you give now matters nearly as much as how much you give.
What a Donor-Advised Fund Actually Is
A donor-advised fund is a charitable account held at a sponsoring public charity. You contribute cash, appreciated securities, or other assets to the account. You claim the charitable deduction in the year you make the contribution. Then, on your own schedule, you recommend grants from the account to the operating charities you wish to support.
Three features define how these accounts work. First, the contribution is irrevocable, which means the money legally belongs to the sponsoring charity once it is transferred and cannot be returned to you. Second, the assets can be invested and any growth is not taxed, so a $20,000 contribution may fund more grantmaking over time than $20,000 given directly. Third, the deduction and the grant are separated in time: you may fund the account in one year and distribute over the following decade. That third feature is the reason these accounts became more interesting in 2026.
Two Federal Changes That Took Effect in 2026
A 0.5 percent floor for people who itemize
Beginning with the 2026 tax year, a taxpayer who itemizes may deduct only the portion of charitable contributions that exceeds 0.5 percent of adjusted gross income. The Internal Revenue Service states the rule directly in Topic no. 506, Charitable contributions: amounts falling under the 0.5 percent floor cannot be deducted.
Consider what that means in practice. A household with $200,000 of adjusted gross income absorbs the first $1,000 of charitable giving with no deduction at all. A household with $400,000 of adjusted gross income absorbs the first $2,000. The floor applies to the combined total of cash and non-cash gifts for the year, and it is applied before the traditional percentage-of-income limits.
A separate provision limits the tax benefit of itemized deductions for taxpayers in the top 37 percent bracket, which the IRS notes in its 2026 inflation adjustment release. For most households in our area the 0.5 percent floor is the change that will actually show up on a return.
A new deduction for people who do not itemize
The same law created something taxpayers have not had on a permanent basis before. Starting in 2026, a filer who claims the standard deduction may also deduct up to $1,000 of cash charitable contributions, or up to $2,000 for a married couple filing jointly. This matters because the 2026 standard deduction is $32,200 for married couples filing jointly and $16,100 for single filers, so a large majority of households never itemize at all.
Two limits are worth knowing. The deduction covers cash or check gifts only, so contributions of appreciated stock do not qualify. Contributions to donor-advised funds are generally excluded from this particular deduction as well, which is a distinction that catches people by surprise.
Why Donor-Advised Funds Fit the New Floor
The 0.5 percent floor is charged once per tax year, not once per gift. That single detail changes the arithmetic of steady annual giving.
Imagine a couple with $200,000 of adjusted gross income who give $9,000 to charity every year and whose other itemized deductions total $18,000. Spread evenly, they clear the floor by $8,000 each year but never reach the $32,200 standard deduction threshold, so the giving produces no federal tax benefit whatsoever. If instead they contribute $27,000 to a donor-advised fund in a single year and give nothing directly in the two following years, that one year of deductions may exceed the standard deduction, and the floor is absorbed once rather than three times. Their favorite charities can still receive roughly $9,000 a year, because grants from the account continue on the old schedule.
This approach is often called bunching. It does not create new money for charity. It concentrates deductions into years where they clear a threshold. Whether it helps depends on your income, your other deductions, and the size of your giving, so run the numbers before assuming it applies to you.
A. The full $1,200
B. $1,000
C. $200
D. Nothing, because the gift is below the floor
Giving Appreciated Securities Instead of Cash
One of the more useful things a donor-advised fund can accept is appreciated stock rather than cash. When you donate a publicly traded security that you have held for more than one year, you may generally deduct its fair market value and you do not recognize the capital gain that would have applied had you sold it. A position purchased for $5,000 that is now worth $20,000 can fund $20,000 of eventual grants without the embedded gain ever being taxed.
Two constraints apply. Deductions for gifts of appreciated property to public charities are generally limited to 30 percent of adjusted gross income for the year, compared with 60 percent for cash gifts, with excess amounts carried forward for up to five years. And the 0.5 percent floor applies to these gifts as well, since it is measured against total charitable contributions rather than cash alone.
For clients holding a concentrated position with a low cost basis, this is often the most efficient way to give.
Qualified Charitable Distributions Are a Separate Tool
If you are at least 70 and a half years old, a qualified charitable distribution from an individual retirement account works differently and sidesteps the floor entirely. The money moves directly from the IRA to the charity and never appears in your taxable income, so there is no deduction to floor and no need to itemize. The amount can also count toward a required minimum distribution.
For 2026 the IRS set the annual limit at $111,000 per person, up from $108,000 in 2025, along with a $55,000 cap on the one-time election to fund a split-interest entity. Both figures appear in IRS Notice 2025-67.
One rule catches people every year: a qualified charitable distribution may not be directed to a donor-advised fund. The two strategies coexist, but they cannot be combined in a single transfer.
Where California Treatment May Differ
California does not automatically adopt federal tax changes. State conformity depends on legislation, and the provisions described above are recent enough that state treatment should be confirmed rather than assumed. California also uses a standard deduction that is a small fraction of the federal amount, which means some households itemize on the state return even when they claim the standard deduction federally. The California Franchise Tax Board publishes current figures and conformity guidance, and your tax preparer can confirm how a given strategy flows through to your state return.
Questions Worth Asking Before You Open an Account
- What does the sponsoring charity charge in administrative fees, and what do the underlying investment options cost?
- Is there a minimum contribution, and is there a minimum grant size?
- Does the sponsor accept the assets you want to give, including appreciated stock?
- How would concentrating several years of giving into one year affect your marginal bracket?
- Do you have carryforward charitable deductions from years before 2026, which are not subject to the new floor?
Donor-advised funds are not the right answer for every household. If your giving is modest and you comfortably clear the standard deduction, or if you are already using qualified charitable distributions, the added complexity may not earn its keep. The question is worth working through deliberately rather than at the end of December.
Talk Through Your Own Giving Plan
We help clients in Sacramento and throughout California coordinate charitable giving with the rest of their financial plan, including which assets to give, which year to give them, and how the new floor interacts with their bracket. If you would like to look at your own numbers, you are welcome to schedule a free 30-minute call with us.
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Rooney Wealth Management LLC is an investment adviser registered with the state of California. This article is for educational purposes only and is not tax, legal, or investment advice. Please consult your tax or financial professional regarding your specific situation.
