Key Takeaways
- The One Big Beautiful Bill Act (OBBBA) introduces a new limitation on itemized deductions for top earners — reducing tax benefits beginning in 2026 for those in the 37% tax bracket.
- Charitable deductions face a new 0.5% adjusted gross income (AGI) floor in 2026, prompting taxpayers to consider accelerating contributions into 2025.
- The state and local tax (SALT) deduction cap temporarily increases to $40,000 in 2025, creating planning opportunities before it reverts to $10,000 in 2030 (unless extended).
The One Big Beautiful Bill Act (OBBBA) introduced sweeping changes to itemized deductions for individuals. With several of the most impactful changes effective January 1, 2026, now is the time to assess how these updates will affect your year-end tax planning.
Limitation on Itemized Deductions
Before 2018, the Pease limitation reduced total itemized deductions by 3% of adjusted gross income (AGI), if AGI exceeded applicable thresholds, capped at an 80% reduction. The Tax Cuts and Jobs Act of 2017 (TCJA) repealed the Pease limitations from January 1, 2018, to December 31, 2025.
Effective January 1, 2026, OBBBA permanently repeals the Pease limitation and establishes a new limitation on itemized deductions. The new limitation caps the tax benefit of itemized deductions for taxpayers in the 37% tax bracket, which in 2025 applies to income above $626,350 for single filers and $751,600 for married taxpayers filing jointly (MFJ).
Itemized deductions will be reduced by 2/37 of the lesser of:
- Total itemized deductions.
- The taxable income, increased by itemized deductions, that exceeds the dollar amount above the starting point of the 37% rate bracket. This limitation applies after application of other itemized deduction limitations.
Taxpayers in the top bracket should work with advisors this month to model the impact of this limitation, which begins in 2026.
Charitable Contributions
OBBBA establishes a permanent charitable contribution floor for itemizing taxpayers for tax years beginning after December 31, 2025. Starting in 2026, aggregate charitable contributions are deductible only to the extent they exceed 0.5% of the taxpayer’s AGI. For taxpayers with charitable carryovers, the floor application is based on the year of the original contribution; carryovers sourced from pre-2026 gifts are not subject to the floor, while those originating in later years are.
Encouragingly, OBBBA makes permanent the 60% AGI limit for cash contributions, an increase from the 50% AGI limit that was in place prior to the TCJA. Additionally, beginning after 2025, individual taxpayers who use the standard deduction may claim deductions for certain cash charitable gifts, up to $1,000 for single taxpayers and $2,000 for MFJ. This does not apply to contributions of appreciated securities or contributions through donor-advised funds.
As the 0.5% floor on contributions begins in 2026, taxpayers should consider accelerating contributions into 2025 to secure full deductibility under the current rules.
State and Local Tax (SALT) Deduction Limit
Prior to 2018, SALT deductions did not have a cap, generally allowing taxpayers to fully deduct their state and local income taxes or general sales taxes (one or the other, but not both), real property taxes and personal property taxes. The TCJA imposed a $10,000 limit, which 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 (MFJ) and $250,000 for married taxpayers filing separately (MFS). The cap is $10,000 for taxpayers with MAGI over $600,000. Beginning in 2026, the limit increases 1% annually through 2029, then reverts to $10,000 in 2030.
While proposals were made that would have limited the use of Pass-Through Entity Tax (PTET) regimes, none made it into the final version of OBBBA. As a result, taxpayers may still benefit from PTETs if they are partners in a partnership or shareholders in an S Corporation.
With the SALT cap increasing in 2025, taxpayers should work with advisors to determine eligibility for a higher 2025 deduction and may benefit from prepaying state and local taxes before year-end.
Gambling Losses
Prior to OBBBA, gambling losses were an allowable itemized deduction up to the amount of gambling winnings included in a taxpayer’s gross income. Starting in 2026, taxpayers may deduct only 90% of gambling losses, up to the amount of gambling winnings. For example, a taxpayer with $10,000 in winnings and $10,000 in losses would be allowed a $9,000 deduction. Unused losses cannot be carried forward.
Other Deductions Made Permanent
Mortgage interest deduction limits imposed under the TCJA remain in effect – interest may only be deducted on up to $750,000 for acquisition debt ($375,000 for MFS) for mortgages entered into after December 15, 2017 (special rules apply for older mortgage debt). Home equity loan interest continues to be suspended. The suspension for 2% miscellaneous itemized deductions (investment expenses) was also made permanent.
Planning Strategies: Preparing for the 2026 Landscape
The upcoming changes to itemized deductions under OBBBA make year-end a critical time for strategic planning. Key steps to consider include:
- Accelerating charitable giving into 2025 to maximize the 37% deduction.
- Combining/stacking 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.
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 service team or:
Christina McLoughlin, CPA
Partner
cmcloughlin@pkfod.com
Trevor Smith, CPA
Manager
tsmith@pkfod.com
Sarah Walsh, EA
Manager
swalsh@pkfod.com