Key Takeaways
- The One Big Beautiful Bill Act permanently repeals the Pease limitation but imposes new itemized deduction caps on taxpayers in the 37% tax bracket beginning in 2026.
- State and local tax deductions increase to $40,000 in 2025 under OBBBA, with phaseouts for higher-income taxpayers and future adjustments before reverting to $10,000 in 2030.
- Charitable contribution rules under OBBBA include a permanent 60% AGI limit for cash gifts, new above-the-line deductions for non-itemizers and a 0.5% AGI floor beginning in 2026.
The One Big Beautiful Bill Act (OBBBA) ushers in sweeping changes, including major reforms to individual tax rules. One of its most notable changes is the permanent repeal of the “Pease limitation,” a rule that for decades reduced itemized deductions for higher-income taxpayers. While that repeal may be welcome, the Act replaces it with new caps affecting taxpayers in the 37% bracket.
With year-end just around the corner, it’s a good time to review your options. Accelerating charitable contributions, reconsidering state and local tax strategies or timing deductions carefully can help preserve deduction value. Reviewing and adjusting plans now can help taxpayers make the most of the changes before year-end.
A Look Back: The Pease Limitation
The Pease limitation was first enacted in 1991. It reduced itemized deductions by 3% of adjusted gross income (AGI) above a set threshold, up to a maximum reduction of 80%. For many high-income taxpayers, this effectively increased their tax rate without changing the official bracket. The rule was suspended under the Tax Cuts and Jobs Act (TCJA) from 2018 through 2025, and before OBBBA, it was set to return in 2026. Some deductions — like medical expenses, gambling losses and investment interest — were always excluded, which meant taxpayers with similar incomes could see very different impacts.
For 2025, the top 37% bracket applies to individuals with income greater than $626,350 and married couples filing jointly with income above $751,600, highlighting who will be most affected by changes under OBBBA.
OBBBA Reform
OBBBA permanently repeals the Pease limitation. Unlike for the 2018 through 2025 tax years, however, OBBBA replaces it with a different cap on itemized deductions. Under the new law, effective January 1, 2026, taxpayers in the top 37% tax bracket will have their itemized deductions reduced by 2/37ths of the lesser of:
- The amount of their otherwise allowable itemized deductions.
- The excess of their taxable income (including those deductions) over the dollar threshold at which the 37% bracket begins.
The Act also establishes a permanent charitable contribution floor for individual taxpayers who itemize beginning with tax years after December 31, 2025. Here, an individual’s aggregate charitable contributions are deductible only to the extent they exceed 0.5% of the taxpayer’s “contribution base,” defined as adjusted gross income (AGI), calculated without regard to charitable deductions.
State and Local Tax (SALT) Deduction Limit
Prior to 2018, there was no cap on SALT deductions, allowing taxpayers in high-tax states to fully deduct what they paid. This deduction included state and local income taxes or general sales taxes (one or the other, but not both), real property taxes and personal property taxes. The $10,000 limit introduced under TCJA remained in effect through 2024. Under OBBBA, the cap rises to $40,000 for 2025, with phaseouts for taxpayers with modified AGI (MAGI) over $500,000 for married filing jointly (MFJ) and $250,000 for married filing separately (MFS). Beginning in 2026, the limit increases 1% annually through 2029, then reverts to $10,000 in 2030 unless extended.
High-income taxpayers may still benefit from state pass-through entity taxes (PTETs), which offer additional planning opportunities.
Charitable Contributions
OBBBA makes permanent the 60% AGI limit for cash contributions. Beginning after 2025, individual taxpayers who do not itemize may claim above-the-line deductions for certain charitable gifts — $1,000 for singles and $2,000 for married couples filing jointly — though donor-advised funds are excluded. Contributions made before 2026 are not subject to the 0.5% AGI floor, while contributions made after the floor takes effect will be. Careful planning of the timing and amount of donations can help maximize deduction value under the new rules.
Gambling Losses
Starting in 2026, taxpayers may deduct only 90% of gambling losses, up to the amount of gambling winnings. For example, $10,000 in winnings with $10,000 in losses would allow a $9,000 deduction. Unused losses cannot be carried forward.
Other Deductions Made Permanent
Mortgage interest limits under TCJA remain in effect: $750,000 for acquisition debt and $375,000 for married filing separately. Home equity loan interest continues to be suspended. The 2% miscellaneous itemized deduction suspension also remains permanent.
Planning Strategies
Given the new caps and changes under OBBBA, high-income taxpayers should review their current itemized deduction and charitable giving strategies to ensure they are maximizing available tax benefits. Key steps to consider include:
- Accelerating charitable giving into 2025 to maximize the 37% deduction.
- Bunching charitable and other itemized deductions to optimize benefits under the new caps.
- Reviewing and coordinating state and local tax strategies, including PTET elections in high-tax states like New York and California.
- Timing deductions and contributions around AGI thresholds to preserve the value of itemized deductions under OBBBA.
Contact Us
The PKF O’Connor Davies Private Client Services team works closely with high-net-worth individuals to navigate the changing tax environment. For guidance on income, gift, trust and estate tax planning, charitable giving, accounting and fund administration, contact your client engagement team or:
Christina McLoughlin, CPA
Partner
cmcloughlin@pkfod.com
Alan S. Kufeld, CPA
Partner
akufeld@pkfod.com
Trevor Smith
Manager
tsmith@pkfod.com
Sarah Walsh
Manager
swalsh@pkfod.com