The end of the year offers an ideal opportunity to look both forward and backward—reflecting on recent achievements while setting goals for the upcoming months. For many people, it’s also a time to review their finances and identify charitable moves that can help lower their tax bill.
If you’ve had a particularly high-income year, this is especially important. You might be feeling especially confident about your finances, but you may also be facing an unexpected tax liability associated with that additional income. Fortunately, there are several strategies that can help you potentially reduce your tax burden while also supporting your favorite charity.
What Is a “High-Income” Year?
A high-income year isn’t necessarily the result of a promotion or job change. (This would be a sustained income increase that can invite some financial planning of its own.) It is actually defined as a year when your taxable income is significantly higher than usual—the result of a temporary spike or one-time event such as a large bonus, the sale of a business or property, or substantial investment gains.
What Are the Tax Consequences of a High-Income Year?
From a tax planning perspective, a high-income year is important to identify because it could mean an abrupt bump into a higher tax bracket, the loss of certain deductions or credits, or exposure to additional taxes or higher Medicare premiums.
Most people understand that a higher income equals a higher tax bill. And with ordinary income, that is typically expected. However, if you experience a high-income year, it can be painful to pay the extra taxes, especially knowing that the increased amount of money flowing into your account is not an ongoing event.
Beyond the immediate tax impact, a significant income spike can create ripple effects throughout your financial picture. Higher earnings may disqualify you from valuable tax credits that help with everyday expenses. For Medicare beneficiaries, increased income can trigger IRMAA surcharges, raising your Part B and Part D premiums based on your modified adjusted gross income.
These considerations have become even more important following the July 2025 passage of the One Big Beautiful Bill Act (OBBBA), which introduced substantial changes including an expanded SALT deduction cap of $40,000 (up from $10,000) and a new senior deduction allowing up to $6,000 per person effective in 2025. Given these new thresholds and phaseout ranges, it’s essential to evaluate any income opportunities strategically—making an effort to capture available deductions and credits while working to avoid unintended benefit reductions this year.
As a reminder, the OBBBA established a 0.5% AGI (adjusted gross income) floor for itemized charitable deductions and will limit the deduction value to 35% for taxpayers in the top 37% bracket starting in 2026, providing a potential incentive to accelerate charitable gifts into 2025. These provisions overall are expected to make “bunching”—consolidating multiple years of charitable gifts into a single tax year to exceed the standard deduction threshold—a more attractive strategy.
Additionally, starting in 2026, standard deduction filers can claim up to $1,000 (individuals) or $2,000 (joint filers) for direct cash donations to qualified operating charities. This “below-the-line” deduction does not apply to DAF contributions and will be adjusted for inflation going forward. It provides an incentive to defer charitable gifts to 2026 if you’re taking the standard deduction.
The good news is that even with the new layers of OBBBA complexity, a little planning can go a long way to help you combine your charitable mindset and tax savings.
Tax-Advantaged Ways to Donate to Charity
Your windfall can offer you the chance to make a philanthropic gift in a way you may not have previously considered. It could mean the ability to support causes you care about in a meaningful way while also creating potential tax benefits.
While you could always make a direct cash gift to the organization of your choice, other giving strategies may offer additional tax benefits. Some of these strategies are straightforward, don’t require much setup, and can make a difference right away. Others often involve estate planning or legal help but can make a bigger impact.
Here are three to consider.
Donor-Advised Fund (DAF)
With a donor-advised fund, you make a charitable contribution to a fund that is held in a custodial account. While you make the donation and receive the tax deduction for the entire sum today, you don’t have to select the charities or how you want to allocate your funds at the time of the gift. The money can sit in the DAF until you’ve determined where and at what pace you’d like to donate. Since the assets can still be invested, they may continue to grow for an even bigger impact.
A DAF is appealing because, rather than making an immediate generous contribution to a group, you have the latitude to do more research or give a smaller amount and evaluate how the organization uses its money. Some people also use it as a way to introduce their children to a philanthropic mindset—inviting them to be part of an annual conversation about where they’d like to donate.
You can also donate assets other than cash to a DAF, which can make them favorable for those who have realized large stock gains. For example, if you purchased stocks for $10,000 that are now worth $100,000, you can donate the appreciated portfolio and avoid capital gains, while getting the deduction for the entire fair market value of $100,000.
Donors can maximize this approach by making a large, fully deductible contribution to a DAF during a high-income year, then recommending distributions to their preferred charities over subsequent years while taking the standard deduction.
Qualified Charitable Distribution (QCD)
If you are age 70 ½ or older, you can make a qualified charitable distribution (QCD) and donate up to $108,000 total for 2025 to one or more charities directly from a taxable IRA instead of taking required minimum distributions. The result is that donors may avoid being pushed into higher income tax brackets and prevent phaseouts of other tax deductions. The QCD is especially useful if you take the standard deduction rather than itemizing, which would mean you otherwise wouldn’t realize the tax break.
While it might be too late to deploy this strategy in the current year, it’s something to consider for next year. Just remember that with QCDs, timing is everything because the first dollars withdrawn from an IRA in any year are deemed to satisfy the RMD, so you should take the QCD before any RMDs. Because your RMD is based on your account value as of December 31 of the prior year, you can work with a financial advisor to estimate what your future RMD will be and begin to plan the right strategies, including potentially donating it to avoid unexpected taxes.
Beginning in 2026, as mentioned above, the OBBBA introduces a 0.5% AGI floor for itemized charitable deductions and caps the deduction benefit at 35% for top-bracket taxpayers. QCDs can offer significant advantages in this new landscape by completely bypassing both restrictions—the distribution is excluded from AGI entirely, so it avoids the floor and isn’t subject to the cap. Additionally, QCDs directly reduce AGI rather than serving as an itemized deduction, helping manage income-sensitive thresholds like Medicare premium surcharges (IRMAA) and helping you to qualify for other AGI-dependent deductions.
Charitable Gift Annuity
If you want to make a considerable donation now but would benefit from receiving future income, a charitable gift annuity may be a good solution. This planned giving strategy allows you to make an irrevocable gift of cash or appreciated assets to a charity organization. In return, the nonprofit organization agrees to pay you a fixed annual income for life. It’s a unique blend of philanthropy, retirement income planning, and tax planning.
With this strategy, you claim a tax deduction for only the amount the charity will keep—calculated as the amount donated minus the value of the payments that will eventually be made. For example, if you give $30,000 to a charity with the expectation that $20,000 is the donation and the remaining $10,000 will be returned in payments, you would deduct approximately $20,000. Additionally, if appreciated assets like stocks are used to fund the annuity, some capital gains taxes can be reduced or deferred.
Please keep in mind that not all nonprofits will accept this type of gift because of its complexity. You should check with the charity you wish to support to see if they can accommodate a charitable gift annuity.
The OBBBA preserved and enhanced the one-time “split-interest” QCD option, allowing taxpayers age 70½ or older to direct up to $54,000 in 2025 (inflation-adjusted) from an IRA to fund a charitable gift annuity or charitable remainder trust. This strategy provides a steady income stream while satisfying part of their Required Minimum Distribution without increasing taxable income. Starting in 2026, the OBBBA’s new 0.5% AGI floor for itemized charitable deductions means only contributions exceeding that threshold will be deductible. Using a QCD to fund a charitable gift annuity avoids this limitation, as the distribution is excluded from AGI rather than claimed as an itemized deduction.
Professional Advice Can Help You Make the Right Moves
While reducing your tax bill by donating to charity is an admirable act and often a wise financial strategy, you should consult your financial advisor before making any decisions. Since every person’s situation is different, they can help assess the tax risks and advantages and discuss options that align with your current financial position and goals.
If you’re looking for guidance, we’re here to help!
Debra Taylor is not registered with Cetera Wealth Services LLC. Any information provided by this individual is provided entirely on behalf of CWM, LLC and is in no way related to Cetera Wealth Services or its registered representatives.
Generally, a donor-advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.
This article is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.
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