Itemized Deduction Limits
The OBBB created a new cap on itemized deductions that will largely impact high-income clients. The pre-TCJA Pease limitation remains repealed under the new tax law. Starting with the 2026 tax year, a new limit reduces the itemized deductions (including the SALT deduction) by 2/37 of the lesser of the taxpayer’s (1) total itemized deductions or (2) amount of taxable income exceeding the 37% rate bracket. The new limit does not apply when calculating the QBI deduction. The miscellaneous itemized deductions subject to the 2% floor were permanently repealed. Taxpayers who do itemize deductions will only be entitled to deduct charitable contributions to the extent they exceed 0.5% of the taxpayer’s AGI (any disallowed portion may be carried forward if the taxpayer has other charitable contribution carryforwards for the tax year).
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the new limits on itemized deductions in the OBBB.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: The limitations on itemized deductions were necessary to get the OBBB’s valuable income tax breaks past the finish line. Yes, we have placed significant limits on deductions for mortgage interest and charitable giving and eliminated other lesser-used deductions entirely. In exchange, we've provided valuable and necessary tax breaks for Americans at all income levels—definitely a positive for all Americans nationwide.
Bloink: The government introduces deductions in the tax law for a reason. These aren't mere giveaways. Deductions like the charitable contributions deduction and mortgage interest deduction exist to encourage taxpayers to engage in activities that we have decided, from a policy perspective, that we want to encourage. We can’t pretend that the OBBB’s limitations won’t hinder those initiatives.
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Byrnes: These new limitations on the availability of itemized deductions are completely a balancing act. We all know that we had to make cuts in order to pass this critical legislation. When we put it in perspective, the limitations are extremely minimal and impact only a small group of taxpayers who are now able to benefit from stable, permanent tax cuts going forward.
Bloink: This new tax law has gone even further to discourage Americans from making sizable charitable contributions--creating entirely new limits both in terms of the amount of the allowable deduction and the value of their itemized deductions as a whole. In this day and age, we should be doing everything possible to encourage higher-income taxpayers to donate to charity and help those who may be losing valuable government-sponsored benefits.
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Byrnes: The substantial increases in the standard deduction have simply made the itemized deductions less valuable--and significantly fewer Americans are even using the complicated itemized deduction method. We have not eliminated these deductions entirely. Americans who are interested in providing significant assistance to charity will continue to do so, and they'll be able to take a valuable deduction when they do.
Bloink: Yes, we are talking about limitations that on their face primarily only have an adverse impact on the highest-income taxpayers who elect to itemize deductions in the face of the enhanced standard deduction. We’re also talking about the group with the means to offer the most significant assistance to charities. Today, those charities are more important than ever, given the challenges the OBBB created for groups that need charitable assistance the most. The reality is that, as is often the case, the lowest-income taxpayers will ultimately suffer the most due to the newly created limitations on the deduction for charitable donations.