Here's a breakdown of the recent tax law updates, focusing on what's new for individuals, particularly those who itemize deductions. These changes affect your tax planning starting with the 2025 tax year.
Key Changes to Itemized Deductions
New Overall Limit on Deductions: The OBBBA permanently eliminates the "Pease limitation," which previously restricted itemized deductions for high-income earners.
- What's new: Starting in 2026, a new limitation takes effect. It reduces itemized deductions by a specific formula that effectively caps the tax benefit for those in the highest tax bracket at 35%.
- Who it applies to: High-income taxpayers who itemize deductions.
State and Local Tax (SALT) Deduction Cap Temporary Increase: If you live in a state with income or property taxes, this one matters. The deduction for state and local taxes (SALT) has been capped at $10,000 in recent years.
Here’s the new schedule:
- 2025–2029: Cap rises to $40,000, with a 1% annual increase.
- High earners (MAGI over $500,000): The cap phases back down, eventually reaching $10,000 again.
- 2030 onward: Cap reverts to $10,000 for everyone.
Charitable Contributions:
- What's new: Beginning in 2026, a 0.5% floor is imposed on itemized charitable contributions. This means you can only deduct the amount of your donations that exceeds 0.5% of your Adjusted Gross Income (AGI).
- If your donations don’t meet this threshold, you can carry forward the excess to future years—but only if you exceed the 0.5% floor in that year.
- Who it applies to: Taxpayers who itemize and make charitable donations.
- Non-itemizers: can deduct up to $1,000 (individually) or $2,000 (joint) for monetary gifts.
Permanent Suspension of Miscellaneous Deductions:
- What's new: The OBBBA permanently suspends the deduction for most miscellaneous itemized expenses, such as fees for investment advice and tax preparation, which would have been available under prior law.
- Who it applies to: All taxpayers.
Other Important Changes to Deductions
Deductions for Tips and Overtime Pay:
· What's new: For tax years 2025 through 2028, a new, temporary "above-the-line" deduction is available for qualified tips (up to $25,000) and overtime pay up to $12,500 (or $25,000 for joint filers).
· Who it applies to: Employees who earn tips or overtime pay. These deductions are subject to income phase-outs.
New Car Loan Interest Deduction:
- What's new: You can temporarily deduct up to $10,000 in interest on a loan for a new U.S.-assembled vehicle purchased for personal use.
- Who it applies to: This is available for tax years 2025 through 2028 and is also subject to income limitations.
Benefits for Small Business Owners and Investors:
- What's new: The OBBBA increases the maximum Section 179 deduction and its related phase-out threshold for small businesses. It also expands the exclusion for gains on qualified small business stock (QSBS) acquired after July 4, 2025.
- Who it applies to: Small business owners and investors.
What Should You Do?
These new changes could impact your tax planning, especially if you’re a high-income earner, a small business owner, or someone who regularly donates to charity. The rules are complex, and the benefits vary depending on your income and filing status.
Let us help you understand how these updates affect your specific situation in tax years 2025, 2026 and beyond. It is always our goal to make your life #LessTaxing. If you have questions or want to schedule a consultation, feel free to reach out to your accountant or the office at 614-891-5423.