Practitioner’s Tax Action Bulletin®
February 2, 2026
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.
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. Because their MAGI exceeds $500,000, the $40,000 maximum 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.
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.
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.
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)]. 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.
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.
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 2: 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.
Planning Tip: 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 $111,000 (for 2026; $108,000 for 2025) from their IRAs. QCDs count towards the required minimum distribution (RMD) without increasing AGI.
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.
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 3: Sam, who isn’t a professional gambler, goes to Las Vegas several times a year. In 2026, 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.
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)].
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.
Example 4: 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. Their taxes are calculated as follows for 2026 and 2027 (using tax rates and standard deduction in effect for 2026):
2026 2027
AGI $850,000 $850,000
Itemized Deductions:
Charitable Contributions (after 0.5% floor) $35,750 $35,750
State and Local Taxes 6,000 6,000
2/37 Reductiona (2,257) (39,493) _(2,257) (39,493)
Taxable Income __810,507 810,507
Income Tax (37% marginal tax rate) ___222,052 222,052
a 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).
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.
Conclusion
The 2025 Act provides a fresh opportunity to engage in tax planning. Itemized deduction planning is an important part of your overall strategy to address the tax provisions in the 2025 Act.
Editor’s Note: The full article presented above is available in the Practitioner’s Tax Action Bulletin, as Tax Action Memo (TAM-2351), first published in Issue 23 Dated December 9, 2025, along with other valuable tax practitioner articles. Contact Our Sales Team for a Subscription to Checkpoint’s bi-monthly Practitioner’s Tax Action Bulletin, which is available in print, and online or to add Thomson Reuters Planner CS to your advisory toolkit.
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