As the sunset of the Tax Cuts and Jobs Act (TCJA) of 2017 approaches, the One Big Beautiful Bill Act (OBBBA) of 2025 introduces significant updates to key tax provisions—particularly those related to itemized deductions. Unless otherwise noted, the following changes take effect on January 1, 2026.

State and Local Tax (SALT) Limitation

• Effective January 1, 2025, the SALT deduction cap increases from $10,000 to $40,000 for most taxpayers.
• The cap will increase by 1% annually from 2026 through 2029 (e.g., $40,400 in 2026).
• In 2030, unless extended or amended, the SALT deduction cap is scheduled to revert to $10,000.
• The deduction begins to phase out for higher-income taxpayers:
• For those with modified adjusted gross income (MAGI) over $500,000, the allowable SALT deduction is reduced by 30% of the amount by which MAGI exceeds $500,000.
• Taxpayers with MAGI above $600,000 are limited to a $10,000 SALT deduction.
• Pass-through entity taxes (PTET) continue to be deductible under current law and are not subject to the SALT cap.

Itemized Deduction Limitation for High-Income Taxpayers

• Taxpayers in the highest income tax bracket (37%) are subject to a limitation equal to 2/37ths of the lesser of:
  • Total itemized deductions (e.g., SALT, charitable contributions, mortgage interest), or
  • Taxable income subject to the 37% rate
• This effectively limits the benefit of itemized deductions to approximately $0.35 per dollar for taxpayers in the top bracket.

Charitable Contribution Updates

• The temporary TCJA increase in the cash contribution limit to public charities—from 50% to 60% of AGI—is now made permanent under the OBBBA.
• Above-the-line deductions are available for non-itemizers: up to $1,000 for single filers and $2,000 for joint filers.
• For itemizing taxpayers:
  • A 0.5% AGI floor must be exceeded before charitable contributions become deductible.
  • Contributions exceeding this floor and within applicable limits (60% for cash, 50% for non-cash) are deductible.
  • Unused contributions above the 0.5% floor may be carried forward for up to five years.

Casualty Losses

• OBBBA expands the deductibility of personal casualty losses to include those from both federally and state-declared disasters, applicable for tax years after December 31, 2025.
• The requirement that losses must be from declared disasters to be deductible is now permanent.

Mortgage Interest Deduction

• The OBBBA permanently extends the provision limiting the qualified residence interest deduction to the first $750,000 of home acquisition debt. This means the pre-December 16, 2017 limit of $1 million is not reinstated for new mortgages, except for grandfathered loans.
• Beginning with the 2026 tax year (returns filed in 2027), homeowners can deduct Private Mortgage Insurance (PMI) premiums paid on acquisition debt. This deduction, which had expired after the 2021 tax year, is reinstated and subject to an AGI phase-out between $100,000 and $150,000 for single filers and $200,000 and $250,000 for joint filers.
• Interest on home equity loans generally remains non-deductible, unless the loan proceeds are used to buy, build, or substantially improve your primary residence or second home, and the total debt is within the $750,000 limit.

Miscellaneous Deductions

• The OBBBA permanently eliminates the deduction for miscellaneous itemized expenses exceeding 2% of AGI. These deductions were temporarily suspended under the TCJA.
• Disallowed expenses include, but are not limited to:
  • Investment advisory fees
  • Tax preparation fees
  • Unreimbursed employee business expenses
• Educator expenses will now become an itemized deduction not subject to the 2% floor for miscellaneous deductions.
  • This change may allow educators who itemize to deduct more than the current $300 limit if their expenses exceed that amount.
  • However, educators who take the standard deduction generally will not be able to deduct educator expenses beyond the initial $300 (or $600 for joint filers).
  • The $300 (or $600 for joint filers) above-the-line deduction will continue to be available on Schedule 1 for those who do not itemize.
  • Eligibility for educator expenses is expanded to include coaching and athletic equipment costs.

Wagering Losses

• Under the OBBBA, deductible wagering losses are limited to 90% of wagering gains, a change from the TCJA rule that allowed a full (100%) deduction of losses against winnings.

The tax professionals at BCS are committed to guiding you through these legislative changes and ensuring you maximize your deductions effectively. Contact your BCS advisor today to discuss how these updates may impact your tax planning strategy.