Tax law changes may make most Americans hold off on cash donations

The new tax-and-spending package signed by President Trump introduces major charitable deduction changes effective 2026: a 0.5% of AGI floor (only donations above 0.5% of AGI are deductible) and a cap that limits the value of itemized deductions to a 35% tax benefit for those in the top 37% bracket. Non-itemizers will gain an above-the-line cash donation deduction beginning in 2026 (up to $1,000 single / $2,000 joint). Advisers recommend itemizers accelerate or bunch donations into 2025 (or use donor-advised funds or private foundations) to avoid the floor and reduced benefit, while non-itemizers should delay cash gifts until 2026 to capture the new deduction; the article illustrates the impact with a $1M-AGI donor giving $20,000 (2025 benefit ~$7,400 vs 2026 benefit ~$5,250).

Analysis

Market structure: The 2026 rules create a two-speed charitable market—wealthy itemizers will pull giving forward into 2025 (benefiting custodians/DAF sponsors and wealth managers) while ~90% of filers (non-itemizers) will boost small-dollar donations starting 2026 (benefiting payment processors and mass-market platforms). Expect concentrated flows: DAF contributions in late‑2025 could add several $10s of billions to custodial AUM, increasing fee-bearing assets for SCHW/BLK/MS; conversely, top‑bracket donation tax value falls from 37% to 35%, reducing marginal tax arbitrage for the very richest.

Risk assessment: Tail risks include Congressional reversal or delayed IRS regs (weeks–months), and HNW accelerated liquidations in Q4‑2025 causing episodic selling pressure on illiquid mid-caps (short‑term days/weeks). Hidden dependencies: the magnitude depends on DAF investment mix (money‑market vs equities) and behavioral response—if DAFs park funds in cash, equity demand falls; if invested, they lift markets. Key catalysts: final IRS guidance (expected within 60–120 days), Nov–Dec 2025 giving data, and mid‑2026 payout behavior.

Trade implications: Near term (Q4‑2025) favors custodians and DAF facilitators; medium term (2026) favors payment processors handling mass small gifts. Tactical actions: position into SCHW ahead of year‑end 2025 DAF inflows and add PYPL heading into 2026 above‑the‑line deduction. Protect portfolios for a potential liquidity-driven selloff with short‑dated SPY puts around the giving season.

Contrarian angles: Consensus understates timing frictions—charities may retain DAF funds (reducing immediate economic stimulus) creating a delayed re‑deployment into markets in 2026–2027. Historical parallel: the 2020 $300 above‑the‑line bump produced a >15% rise in <$250 gifts; similar or larger small‑donor lift in 2026 could materially help PYPL/SQ volumes. Watch weekly giving and DAF AUM growth as early mispricing signals.

Key Decisions for Investors

• Establish a 2–3% long position in Charles Schwab (SCHW) by Oct 1, 2025 to capture expected DAF inflows; target +15–20% by Mar 31, 2026, set tactical stop‑loss at 8% and scale up to 4% if quarterly DAF AUM growth >5% QoQ.
• Initiate a 1–2% long position in PayPal (PYPL) between Dec 2025–Jan 2026 to capture uplift from 2026 above‑the‑line small‑donor activity; target +20% by Dec 31, 2026, stop‑loss −12%; add if weekly small‑gift volume >+10% YoY for two consecutive weeks.
• Buy SPY Jan 2026 1.5% OTM puts (or equivalent put spread) sized to hedge ~3% of portfolio value to protect against an end‑of‑year HNW liquidation shock; allow cost up to 0.8% of portfolio as acceptable insurance premium.
• If IRS publishes rules delaying the AGI floor or if Congress signals repeal within 60 days, reduce SCHW/PYPL exposure by 50% and rotate 1–2% into BLK (BlackRock) or other asset managers that would benefit from delayed payout reinvestment opportunities.