On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, which had narrowly passed through the United States Congress. The OBBBA makes permanent certain tax provisions that were due to expire from the Tax Cuts and Jobs Act (TJCA), which was enacted in 2017. It also includes certain other changes to federal and estate tax law, including, among other things, changes affecting businesses, individuals, and certain aspects of U.S. international taxation.
This client alert focuses on certain changes made to the availability of itemized deductions generally deductible to individuals. Certain of these changes are newly added provisions of the Code, limiting certain itemized deductions in general, while others are focused on specific provisions (e.g., new limits on charitable deductions). Certain provisions also extend changes adopted in the TCJA during the first Trump administration.
Limitation on Overall Itemized Deductions
Pre-TCJA, taxpayers were subject to an overall limitation on itemized deductions, known as the 3%/80% rule under Code Section 68. Under this provision, if an individual's adjusted gross income (AGI) exceeded the inflation-adjusted applicable amount, the amount of itemized deductions otherwise allowed for the tax year was reduced by the lesser of: (a) 3% of the excess of AGI over the applicable amount, or (b) 80% of the amount of itemized deductions otherwise allowable for the tax year. The TCJA eliminated this limitation.
Prior to the OBBBA, this rule was set to apply again in tax year 2026. The OBBBA permanently repeals this limitation and instead generally applies a 2% reduction. Under the OBBBA, itemized deductions will be reduced by 2/37 of the lesser of (a) the amount of the deductions or (b) the taxable income that exceeds the dollar amount at which the 37% rate bracket begins.
The effect of this provision is to reduce the benefit of itemized deductions to individual taxpayers in the top marginal bracket by 2%. Although this provision applies to most itemized deductions, due to other limitations on the more common itemized deductions (e.g., the dollar limitation on the deduction for state and local taxes (SALT) and related phaseout of the increased SALT cap for high-income earners, and the permanent elimination of miscellaneous itemized deductions, discussed below), this rule will most likely impact high-earning taxpayers with respect to their charitable contributions. The result will be that the impact of a charitable contribution will only be at an effective rate of 35%, instead of 37%.
One significant exception to this rule is that the Code Section 199A deduction for qualified business income is excluded from this limitation.
The provision applies to tax years beginning after December 31, 2025.
Individuals' Charitable Deductions
Floor of 0.5 % of AGI is Imposed, and 60%-of-AGI Ceiling for Certain Cash Gifts is Made Permanent
Under pre-OBBBA law, no floor applies for individuals' charitable contribution deduction under Code Sec. 170.
The OBBBA provides for a floor of 0.5% of the taxpayer's contribution base (generally, AGI) on the charitable deductions of individuals. Thus, an otherwise deductible charitable contribution typically must be reduced by 0.5% of an individual's contribution base for the tax year (The OBBBA also enacts a parallel 1% floor for charitable contribution deductions for corporations.).
Under pre-OBBBA law, individuals can't deduct more than a specified percentage of their contribution base (generally AGI) as a charitable deduction in any year. For contributions to 50% charities, an individual may deduct up to 50% of the contribution base, but a 60% limit (60% ceiling) applies to cash-only contributions by individuals to 50% charities.
The rule providing for a 60% ceiling for cash gifts to 50% charities was slated to expire after 2025. Subject to certain limitations, the OBBBA makes permanent the 60% ceiling for cash gifts to 50% charities.
Both the floor and 60%-limit provisions are effective for tax years beginning after December 31, 2025. Given the delayed effective date to 2026, both of the 0.5% floor and the effective 2% decrease in the value of itemized deductions for high-income earners, taxpayers making charitable contributions (and especially those in the top bracket) should consider the benefits of accelerating contributions in 2025 to avoid the new limitations enacted by the OBBBA.
Miscellaneous Itemized Deductions Terminated
Under the TCJA, most individual miscellaneous itemized deductions were not available for tax years 2018 - 2025. The most significant excluded miscellaneous itemized deductions were those for investment-related expenses, i.e., expenses incurred in connection with the production of income not in the context of a trade or business. This rule excludes typical investment-related fees and expenses, such as asset management and similar fees.
Pre-OBBBA, miscellaneous itemized deductions would have been available for tax years beginning in 2026. The Act permanently suspends miscellaneous itemized deductions.
Since the enactment of the TJCA, high-earning taxpayers have implemented several strategies and structures to minimize the impact of eliminating miscellaneous itemized deductions, specifically in the context of investment. While it was unclear if such strategies and structures would continue to be needed after 2025, this provision will require taxpayers to consider approaches to implement in order to contend with the non-deductibility of typical investment expenses.
