Itemized Deductions Update

August 20, 2025

By Chad Stecher, LPA, EA
Tax Manager

The One Big Beautiful Bill Act (OBBBA), signed into law recently, introduced several significant changes to itemized deductions. Taxpayers can claim the higher of the standard deduction or itemized deductions to lower their taxable income. These changes are effective for tax years beginning after Dec. 31, 2025.

1. Charitable contributions now have a 0.5% of AGI floor for taxpayers who itemize, meaning only contributions exceeding 0.5% of adjusted gross income are deductible. The 60%-of-AGI ceiling for certain cash gifts is made permanent.
   
   Note: Non-itemizers can now claim a charitable deduction up to $1,000 ($2,000 for joint returns) for cash contributions to public charities. The 0.5% AGI floor does not apply here.
   
   
2. Miscellaneous itemized deductions were suspended by the Tax Cuts and Jobs Act and set to expire at the end of 2025. Examples include investment advisory fees, tax preparation fees and unreimbursed employee expenses. The OBBBA has now made this suspension permanent with one exception: deductions are allowed for unreimbursed employee expenses for eligible educators. Eligible educators include K-12 teachers, instructors, counselors, interscholastic sports administrators and coaches, principals, and aides in a school for at least 900 hours during a school year. Previously the deduction was limited to $300 and any expenses above this limit were not deductible. Now expenses beyond this $300 can be claimed as an itemized deduction on Schedule A.
3. Gamblers will be further limited to deduct the lesser of their winnings or 90% of their gambling losses. Previously losses were limited only to the extent of winnings.
4. Casualty losses resulting only from federally declared disasters remain deductible permanently. Qualifying disasters were expanded to include state-declared disasters in addition to federally declared disasters.
5. The Pease limitation, which previously reduced itemized deductions for higher-income taxpayers, was permanently repealed. A new limitation was introduced for taxpayers in the 37% income tax bracket. The reduction decreases itemized deductions by 2/37 of the lesser of (a) the amount of the deductions or (b) the taxable income that exceeds the 37% rate bracket threshold.

The state and local tax deduction limit has been expanded for some taxpayers effective for the 2025 tax year. See additional information regarding the state and local tax deduction here.

Itemized deductions that remain the same after the signing of the bill are:

1. Medical and dental expenses remain deductible to the extent they exceed the 7.5% AGI floor.
2. The deduction for qualified residence interest is permanently limited to $750,000 of home mortgage acquisition debt. However, mortgage insurance premiums will be reinstated as a deductible in 2026, subject to income limitations, and treated as qualified residence interest.
3. Investment interest expense remains deductible under existing rules.

If you have questions about how these changes may affect your specific situation, please reach out. We’re here to help you navigate these updates and optimize your tax strategy.

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