By Hilari Pickett, CPA, a Senior Specialist Editor with Thomson Reuters Tax & Accounting
The 2025 Act (also referred to as the One Big Beautiful Bill or OBBB) made significant updates to itemized deductions. This article provides a high-level overview of the many changes to Schedule A (Form 1040) deductions and identifies which provisions are effective for the 2025 tax year and those that won’t take effect until 2026.
State and Local Taxes
For tax years 2018–2025, the Tax Cuts and Jobs Act (TCJA) limited the itemized deduction for state and local taxes (SALT) to $10,000 per year ($5,000 if married filing separately). This limit was set to expire at the end of 2025, but the 2025 Act retroactively enacted a higher limit of $40,000 ($20,000 if married filing separately), effective for the 2025 tax year [IRC Sec. 164(b)(7)]. The amount increases by an additional 1% of the prior year’s limit for tax years 2026–2029. The SALT cap will revert to $10,000 beginning with the 2030 tax year.
The $40,000 limit is reduced (but not below $10,000) by 30% of the excess of modified adjusted gross income (MAGI) over $500,000 ($250,000 for married filing separately) in 2025. This means the deduction is fully phased down to $10,000 when MAGI reaches $600,000 ($300,000 for married filing separately) for 2025. The $500,000 MAGI threshold increases by 1% per year for tax years 2026–2029.
Example 1. Pat and Jo file a joint return in 2025. They have MAGI of $530,000 and paid personal state and local taxes (including property taxes and state income tax) of $48,000. They are initially limited to a $40,000 itemized deduction for these taxes due to the SALT limitation. However, because their MAGI exceeds $500,000, their deduction is further limited. They must reduce their deduction by 30% of every dollar their MAGI exceeds $500,000, or $9,000. Therefore, their SALT deduction is $31,000 ($40,000 – $9,000).
Variation. Assume instead that Pat and Jo have MAGI of $800,000 for 2025. Their MAGI is now $300,000 over the $500,000 threshold for limiting the SALT deduction. Because 30% of their income over $500,000 would exceed $30,000 (the increased $40,000 limitation less the minimum limitation of $10,000), they are limited to a $10,000 SALT deduction.
Planning Tip. With the increased SALT limit, consider whether clients with ownership in pass-through entities should make the Pass-through Entity Tax (PTET) election, even when their SALT deduction is not limited. It may still make sense, because having the pass-through entity pay the tax reduces federal AGI on the owner’s 1040, which has additional potential benefits. But you will need to evaluate each client’s situation and each state’s rules to determine the actual extent of the benefit. For a detailed discussion of this topic, see TAM-2336 (dated 9/9/25).
Qualified Residence Interest
The 2025 Act made the TCJA mortgage interest rules, originally in place only for 2018–2025, permanent. The deduction for interest on debt incurred after 12/15/17 is limited to qualified residence interest on acquisition indebtedness of up to $750,000 ($375,000 if married filing separately) [IRC Sec. 163(h)(3)(F)].
Planning Tip. Although interest expense on home equity loans is generally nondeductible, it is important to understand how the proceeds of a home equity loan were used by the taxpayer. In many cases, taxpayers use home equity loans or lines of credit to fund major home renovations or improvements that allow the debt to qualify as acquisition indebtedness.
Example 2. In March 2025, Emily and Sam purchase their first home. The house has a fair market value of $800,000, and they obtain a $500,000 mortgage on the property. In August 2025, they take out a $250,000 home equity loan, the proceeds of which are used to put an addition on the home. Both loans are secured by the home. Because the total amount of both loans does not exceed $750,000, all the interest paid on the loans is deductible.
Mortgage Insurance Premiums. The 2025 Act also permanently reinstates the treatment of mortgage insurance premiums on acquisition debt as qualified mortgage interest for tax years beginning after 2025 [IRC Sec. 163(h)(3)(F)(i)(III)]. In effect, amounts paid for qualified mortgage insurance premiums are treated as a separate category of qualified residence interest beginning in 2026. This deduction had previously expired on 12/31/21.
The premiums are not subject to the $750,000 limit on acquisition indebtedness. However, the deduction is phased out ratably by 10% for each $1,000 ($500 for married filing separately), or fraction thereof, by which the taxpayer’s AGI exceeds $100,000 ($50,000 for married filing separately). The deduction is therefore unavailable for taxpayers with an AGI exceeding $109,000 ($54,500 for married filing separately) [IRC Sec. 163(h)(3)(E)(ii)]. These thresholds are not indexed for inflation.
Example 3. Mark and Alex are married and filing jointly for the tax year 2026. For 2026, they pay $1,500 for qualified mortgage insurance, and their AGI is $104,000. Consequently, they are $4,000 into the $10,000 phase-out range (40%). Their deduction for qualified mortgage insurance must be reduced by 40%, or $600 ($1,500 × 40%). Therefore, their deduction is $900 ($1,500 – $600).
For more information on the itemized deduction for home mortgage interest, see the Tax Planning and Advisory Individual Tax Planning topic.
Charitable Contributions
Beginning with the 2026 tax year, the 2025 Act reduces the charitable deduction for individuals who itemize by 0.5% of their contribution base, which is generally adjusted gross income [IRC Sec. 170(b)(1)(I)]. In addition, the 2025 Act permanently extends the 60% of AGI limitation for cash contributions to “50% charities,” which was set to expire for tax years beginning after 12/31/25. For more information about the charitable contribution percentage limitations applicable to individuals, see the Tax Planning and Advisory Charitable Giving topic.
The 2025 Act also restricts the carryover of contributions limited by the new 0.5% floor. The floor does not create a carryover on its own. However, to the extent there is a carryover under one of the percentage-limitation rules for that tax year, the amount disallowed solely by reason of the 0.5% floor is also treated as part of the carryforward [IRC Sec. 170(d)(1)(C)].
Example 4. Don and Taylor report AGI of $200,000 in 2026. They itemize deductions and make cash contributions of $500 to public charities. The 0.5% floor is $1,000 ($200,000 × 0.5%), which means no deduction is allowed. In addition, because the contributions are not limited by one of the percentage-limitation rules, the $500 disallowed contribution may not be carried forward, and the deduction is permanently lost.
Variation. Assume Don and Taylor also contribute appreciated securities with a fair market value of $70,000 to a private nonoperating foundation, subject to the 30% limit. The 30% limitation results in a $10,000 percentage-limitation excess [$70,000 – ($200,000 × 30%)]. Applying the 0.5% floor limitation further reduces the total charitable contribution deduction by $1,000 ($200,000 × 0.5%). With a percentage limitation excess to carryover, the taxpayer may now also carry over the $1,000 disallowed by the 0.5% floor. The total carryforward to 2027 will be $11,000 ($10,000 percentage – limitation excess + $1,000 floor disallowance).
Planning Tip. To reduce the immediate impact of the new 0.5% contribution floor, high-income taxpayers should consider accelerating planned 2026 contributions into 2025. Going forward, help your clients determine if bunching charitable contributions or using a Donor Advised Fund makes sense. Clients who are age 70½ or older may also benefit from making Qualified Charitable Distributions (QCDs) of up to $108,000 (for 2025; $111,000 for 2026) from their IRAs. QCDs count towards the required minimum distribution (RMD) without increasing AGI.
Note. Beginning in 2026, the 2025 Act allows taxpayers who take the standard deduction to deduct up to $1,000 ($2,000 MFJ) for cash contributions made to charitable organizations (other than IRC Sec. 509(a)(3) supporting organizations or donor advised funds) [IRC Sec. 170(p)]. The new deduction is permanent and not indexed for inflation. This is a below-the-line deduction (i.e., it does not reduce AGI), similar to the qualified business income deduction and new deductions for tip income, overtime, car loan interest, and seniors for 2025–2028.
Personal Casualty Losses
Prior to the TCJA, personal casualty and theft losses were deductible on Schedule A, subject to a $100 floor ($500 for qualified disaster loss) and a 10% of AGI limitation (0% of AGI for a qualified disaster loss). The TCJA further restricted personal casualty and theft losses to those located in a federally declared disaster area for 2018–2025.
The 2025 Act makes permanent the TCJA limitations on the deduction for personal casualty and theft losses. However, beginning in 2026, in addition to losses from federally declared disaster areas, losses from state declared disaster areas will also be eligible for deduction [IRC Sec. 165(h)(5)].
Planning Tip. Taxpayers may elect to deduct certain casualty and theft losses on the return for the immediately preceding year [IRC Sec. 165(i)]. With the new overall itemized deduction limitation on high-income taxpayers taking effect in 2026, it may be even more beneficial for your clients with 2026 casualty and theft losses to make this election.
A list of federally declared disasters is available at ttps://www.fema.gov/disaster/declarations. For a detailed discussion of the three types of personal casualty and theft losses and the rules that apply to them, see PPC’s 1040 Deskbook. For information on recent disaster relief legislation, see TAM-2337 (dated 9/9/25).
Gambling Losses
Beginning in 2026, the 2025 Act limits gambling losses (for both professional and amateur gamblers) to 90% of the amount of such losses incurred during the year and then limits this amount to the extent of winnings [IRC Sec. 165(d)].
Example 5. Sam, who isn’t a professional gambler, goes to Las Vegas several times a year. In 2026, Sam wins $15,000 playing cards, but later in the year loses $20,000. The gambling winnings of $15,000 are reported as other income on Schedule 1 of Form 1040. Sam’s deduction for gambling losses is limited to the lesser of $18,000 (90% of the gambling losses) or the gambling winnings of $15,000. Therefore, Sam is allowed a $15,000 itemized deduction for gambling losses in 2026.
Variation. Assume instead that Sam won $20,000 playing cards and had gambling losses of $15,000 later in 2026. The $20,000 of winnings are reported as other income on Schedule 1 of Form 1040. The gambling loss deduction is limited to the lesser of $13,500 (90% of losses) or the winnings of $20,000. Therefore, Sam is allowed a $13,500 itemized deduction for gambling losses in 2026.
Note. The 2025 Act also makes permanent the TCJA definition of gambling losses that includes any other deductions in carrying on the trade or business of gambling. This permanently prevents professional gamblers from deducting business expenses beyond their gambling winnings on Schedule C.
Educator Expense
The 2025 Act reclassifies unreimbursed employee business expenses of educators as non-2% miscellaneous itemized deductions, beginning in 2026 [IRC Secs. 67(b)(13) and (g)]. In addition, the 2025 Act expands the definition of eligible educator expenses. The above-the-line deduction for the first $300 (for 2025; $350 for 2026) is still available [IRC Sec. 62(a)(2)(D)]. For more detailed information about deducting educator expenses, see NTA-1333 (dated 10/28/25).
Miscellaneous Itemized Deductions
The 2025 Act permanently eliminates the deduction for 2% miscellaneous itemized deductions, which the TCJA had suspended from 2018–2025 [IRC Sec. 67(h)]. Formerly deductible items such as unreimbursed employee business expenses, investment expenses, and tax determination expenses are permanently disallowed.
Overall Limit on High-income Earners
The TCJA suspended the overall limitation on itemized deductions (the 3% phaseout, otherwise known as the “Pease limitation”) for tax years 2018–2025. The 2025 Act permanently repeals the 3% phaseout but introduces a new version of the overall limitation on itemized deductions. In tax years beginning after 12/31/25, taxpayers are subject to an overall reduction in itemized deductions by 2/37 of the lesser of total itemized deductions or the amount by which income (before itemized deductions) exceeds the 37% bracket threshold [IRC Sec. 68(a)]. This new limit applies after all other applicable floors, phase-outs, and limitations.
Planning Tip. This new reduction to total itemized deductions for high-income taxpayers makes it even more important to consider strategies your clients can use to bring their tax rate down from the 37% bracket to the 35% bracket.
Example 6. Max and Penny, who are both age 75, have an AGI of $850,000 (all ordinary income) in 2026. They make charitable contributions of $40,000 annually and pay $6,000 a year in real estate taxes. Max and Penny have the option to make tax payments in December or January of the following year with no penalties. They expect their AGI in 2027 to remain the same. If they make the 2026 charitable contributions and 2026 annual tax payment in December of 2026, their taxes are calculated as follows for 2026 and 2027 (using tax rates and standard deduction in effect for 2026):
2026 and 2027
$850,000 AGI minus $39,493 Total itemized deductions ($35,750 Charitable contributions + $6,000 State and local taxes – $2,257 (2/37 reduction) = $810,507 Taxable Income.
Income tax = $222,052 (37% marginal rate)
*Itemized deductions before the 2/37 limit total $41,750 ($35,750 + 6,000). The excess of their income over the 37% tax bracket threshold is $81,300 ($850,000 – $768,700). Because the $41,750 of itemized deductions is less than the $81,300 excess income, the 2/37 reduction will be $2,257 ($41,750 × 2/37).
Variation. Now assume that Max has been taking RMDs of more than $40,000 a year from his traditional IRA. If Max makes the couple’s annual $40,000 charitable contribution as a QCD directly from his IRA, this distribution counts toward his annual RMD and reduces the couple’s AGI. Their tax calculations for 2026 and 2027 are now:
2026 and 2027
$850,000 AGI minus $35,500 (Standard deduction) = $774,500 taxable income
Income tax = $208,730
*$32,200 standard deduction + (2 × $1,650) additional standard deduction for taxpayers over 65
Because the charitable contributions are now above-the-line deductions rather than itemized deductions, Max and Penny can use the standard deduction to achieve combined tax savings of $26,644 ($222,052 + $222,052 – $208,730 – $208,730) over the two years compared to the making charitable contributions in 2026 and 2027 from their checking account.
Note. Each client’s situation is unique, so be sure to run through various scenarios in your tax software to determine which option will be the most beneficial based on individual circumstances.
Conclusion
The 2025 Act provides a fresh opportunity for you to engage with your clients in tax planning. Itemized deduction planning will be an important part of your overall tax strategy to address the tax provisions in the 2025 Act.
Use the sample client letter attached to reach out to your clients and set up planning meetings as soon as possible.
You can also find attached a quick reference table listing these itemized deduction changes and when they apply. The article also identifies planning opportunities around these new provisions you can use to help clients reduce their overall income tax liability.
Note. As a subscriber to this newsletter, you may edit and distribute this client communication to clients, potential clients, and referral sources. However, please remember that the material is copyrighted. You may not use it for any other purpose, such as posting it on a website area available to the public or sharing it with another firm.
References. IRC Secs. 62(a)(2)(D); 67(b)(13); 67(g); 67(h); 68(a); 163(h)(3)(E)(ii); 163(h)(3)(F); 164(b)(7); 165(d); 165(h)(5); 165(i); 170(b)(1)(I); 170(d)(1)(C); and 170(p). Unless otherwise specified, code sections refer to the IRC as updated by the 2025 Act.
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