Rules current as of October 2026. Federal charitable deduction rules changed for tax years beginning in 2026. Thresholds and limits referenced here should be confirmed against current IRS guidance before they are applied to a client situation.
Key takeaways
- A liquidity event, such as selling a business or realizing substantial investment gains, may create a year in which charitable deductions are especially valuable.
- The best charitable options usually exist before the deal is certain. Once a sale is effectively locked in, a gift of the business interest may no longer avoid tax on the gain.
- After the event, funding a donor-advised fund (DAF) in the high-income year lets the client take the deduction now and recommend grants over time.
- Advisors who raise charitable planning early, at the first sign of a transaction, give the client the widest range of choices.
What counts as a liquidity event?
A liquidity event generally involves converting a significant asset or ownership interest into cash. Other events that produce unusually high taxable income can create similar opportunities for charitable planning. Situations worth discussing with clients include:
- Sale of a privately held business or a partial interest in it
- Sale of real estate or other long-held appreciated property
- Public offering of a company, or the end of a lock-up period
- Exercise of stock options or vesting of a large equity grant
- A large bonus, earn-out payment, or deferred compensation payout
- A Roth conversion or large retirement distribution
- Sale of inherited assets that have appreciated since inheritance
For charitable planning, the two variables that matter are how much income the event creates and when the client knows it is coming.
Why is the year of a liquidity event so important for charitable giving?
Three features of the tax rules make the event year unusual:
- Higher marginal rates. A deduction offsets income taxed at the client’s top rate for that year, which may be higher than in any other year.
- Higher AGI limits in dollars. Charitable deductions are limited to a percentage of adjusted gross income (AGI). When AGI spikes, the dollar ceiling rises with it, so a client can deduct a larger gift in that year than in a typical year. Amounts above the limit can generally be carried forward for up to five years (IRS Publication 526).
- Additional taxes on investment income. Gains may also be subject to the net investment income tax (IRS Topic 559). A gift of the appreciated asset itself, made at the right time, can avoid both capital gains tax and this tax on the gifted portion. A cash gift after the sale may create an income tax deduction, but it does not eliminate capital gains tax or net investment income tax already incurred on the sale.
A further limitation for high-income taxpayers. Beginning in 2026, the tax benefit of affected itemized deductions for taxpayers in the highest federal income tax bracket is generally limited to 35 cents per dollar rather than 37 cents. Advisors should include this limitation when modeling charitable gifts in a liquidity-event year.
A 2026 note on the deduction floor. Beginning in 2026, itemized charitable deductions are allowed only above 0.5% of AGI (IRS Publication 505, 2026). In a high-income year, that floor is larger in dollars. For a client with $5,000,000 of AGI, the first $25,000 of charitable contributions is generally excluded from the current-year deduction, although limited carryforward provisions may apply. Clients who planned to give that amount anyway may want to concentrate several years of planned giving into the event year rather than spread it out. See our Bunching article for the full comparison. Reference Internal Revenue Code §170(b).
When should charitable planning start?
Before the transaction is certain. The timing window is the most important point in this article.
Under the assignment-of-income doctrine, if a donor transfers an asset to charity after a sale is effectively fixed, the IRS may tax the gain to the donor even though the charity received the asset and the sale proceeds. Revenue Ruling 78-197 addresses a related question for stock redemptions: the IRS treats the proceeds as the donor’s income only if the charity was legally bound, or could be compelled, to sell. Courts and the IRS look at the facts, so the exact point where a gift becomes too late is a question for tax counsel.
| Stage of the transaction | Charitable options | Considerations |
|---|---|---|
| Early: no buyer or no active negotiations | Gift of the business interest or asset itself to a DAF, other fund, or charitable trust | Widest options. Valuation by qualified appraisal. Charity must have real discretion over any later sale. |
| Middle: letter of intent signed, negotiations active | Gift of the interest may still be possible; facts matter | Higher risk that the gain is taxed to the donor. Involve tax counsel before any transfer. |
| Late: definitive agreement signed or sale effectively certain | Plan for a cash or other-asset gift in the same tax year instead. | Donating the interest at this stage presents substantial risk that the gain will be taxed to the donor. |
| After closing, same tax year | Cash gift, or gift of other appreciated assets, to a DAF or charity | Deduction still offsets event-year income. Higher AGI limit applies to cash gifts to public charities. |
Which charitable vehicles fit a liquidity event?
| Vehicle | How it works | Fits clients who |
|---|---|---|
| Direct gift to operating charities | Gift goes straight to one or more charities | Already know exactly which organizations to support and in what amounts |
| Donor-advised fund | Deduction in the year of contribution; grants recommended over time according to the fund agreement | Want the deduction now but need time to decide where the money should go |
| Private foundation | Family-controlled charitable entity with its own board, reporting, and payout rules | Want direct control and can support the administrative cost. See our DAF vs private foundation article. |
| Charitable remainder trust | Trust pays an income stream to the client for a term or for life, with the remainder to charity. The charitable deduction is based on the present value of the remainder interest, not the full amount contributed. | Want to diversify a concentrated position and keep an income stream. Requires careful drafting. |
| Other funds at a community foundation | A designated, field of interest, or endowment fund supports specific organizations or causes over time | Want a permanent or purpose-specific local legacy without running an entity |
For many clients, a DAF is the simplest place to start: it captures the deduction in the event year without forcing every grant decision before December 31. DAFs are offered by national sponsors such as Fidelity Charitable and Schwab Charitable, and by community foundations. Pinellas Community Foundation (PCF) offers the same donor-advised fund structure, opening with as little as $5,000, plus local grantmaking expertise and a direct relationship with Pinellas County nonprofits.
Two reminders for clients using a DAF:
- A grant recommended from a DAF does not create an additional deduction. The deduction is taken when the fund is contributed to.
- Not every fund allows a fundholder to recommend grants on their own. How grant recommendations work depends on the fund agreement.
A planning sequence for the advisory team
- Flag the event early. Ask clients at each review whether a sale, offering, option exercise, or large payout is possible in the next two to three years.
- Estimate the event-year tax consequences. Model projected AGI, applicable charitable deduction limits, the 0.5% floor, and the overall limitation on itemized deductions where applicable.
- Decide what to give. Compare a gift of the business interest before the sale with a cash or appreciated-asset gift after closing. Bring in tax counsel on timing.
- Choose the vehicle. Match the client’s goals to an outright gift, DAF, other fund, private foundation, or charitable trust.
- Engage the receiving organization. Complex assets require review before transfer. Contact the organization before the transaction reaches the letter of intent stage when possible.
- Document and report. Qualified appraisal, written acknowledgment, and Form 8283 for non-cash gifts. Track any carryforward.
For the mechanics of gifting real estate, closely held stock, or business interests, see our Complex Assets article.
Illustration: a business owner selling in 2026
Hypothetical, rounded, for illustration only. A business owner expects to sell her company late in 2026. Her CPA estimates event-year AGI of $6,000,000. She gives about $30,000 a year to local charities and would like to set aside a larger amount for future giving.
- Option A, no planning: she gives $30,000 in cash in 2026. Generally, with a 0.5% floor of $30,000, none of that giving is deductible in 2026.
- Option B, early gift of shares: months before any buyer is engaged, she contributes a portion of her shares to a DAF, supported by a qualified appraisal. If the requirements are met, she may avoid capital gains tax on the gifted shares and qualify for a deduction based on their fair market value, subject to applicable deduction limits and other tax rules.
- Option C, post-closing DAF gift: the sale is already certain. She contributes cash from the proceeds to a DAF before December 31. The deduction offsets 2026 income above the floor, and she recommends grants to local charities over the following years.
The right answer depends on her facts, but in this example, raising the conversation early is what makes Option B available.
What are PCF’s 2026 year-end deadlines?
These are PCF’s general processing deadlines for any year-end gift to any PCF fund.
| Gift type | Deadline |
|---|---|
| Stock or complex assets | To ensure the gift is credited to the 2026 tax year, please initiate by December 18. Contact PCF well before this date for any complex asset. |
| Wire transfers, EFTs, and DAF grant recommendations from funds held elsewhere | Please contact PCF by December 23 before initiating. |
| Cash, check, or credit card | Received, or postmarked if by check, by December 31. December 31 is a Thursday and the final trading day of the year. |
How PCF works with advisors around a liquidity event
PCF supports complex giving strategies and works within your timeline. Whether the client is gifting shares before a sale or funding a DAF after closing, you stay in the loop at every step. PCF can also join a planning conversation with your client when that is useful to you.
Refer a client or start an early conversation about a transaction: Contact Meg Lokey, Vice President of Philanthropy, 727-306-3142, ml****@********cf.org.
Frequently asked questions
When is it too late to donate business shares before a sale?
There is no single bright line. If the sale is effectively certain when the shares are transferred, the IRS may tax the gain to the donor under the assignment-of-income doctrine. The safest approach is to plan the gift before a buyer is committed and involve tax counsel.
Can a client still get a deduction after the sale closes?
Yes. A cash gift, or a gift of other appreciated assets, made in the same tax year can offset event-year income, subject to AGI limits and the 0.5% floor.
Why use a donor-advised fund after a liquidity event?
It lets the client take the deduction in the high-income year without deciding on every grant before December 31. Grants are then recommended over time according to the fund agreement.
What if the gift exceeds the AGI limit in the event year?
Contributions above the applicable AGI limit can generally be carried forward for up to five years, subject to the limits in those years.
Does the 2026 deduction floor affect liquidity event planning?
Yes. The floor is 0.5% of AGI, so it is larger in dollars in a high-income year. Concentrating planned giving into the event year can reduce the share of giving lost to the floor.
Government sources
- IRS Publication 526, Charitable Contributions: irs.gov/publications/p526
- IRS Publication 505 (2026), Tax Withholding and Estimated Tax: irs.gov/publications/p505
- IRS Publication 561, Determining the Value of Donated Property: irs.gov/publications/p561
- IRS Topic No. 559, Net Investment Income Tax: irs.gov/taxtopics/tc559
- IRS Topic No. 506, Charitable Contributions: irs.gov/taxtopics/tc506
- Revenue Ruling 78-197, 1978-1 C.B. 83
Verification note: This article reflects federal tax rules as understood in October 2026. AGI limits, the deduction floor, and the treatment of the itemized deduction limitation should be confirmed against current IRS publications before applying them to a specific client. Timing questions around a pending sale should be reviewed by tax counsel. This article is educational and is not tax or legal advice.
