Beginning in 2026, individuals in the highest federal income tax bracket will face a new cap on itemized deductions. If you expect to fall into the 37% bracket, you may want to take proactive steps before the end of 2025 to lessen the impact.
Understanding the New Limitation
Before the Tax Cuts and Jobs Act (TCJA), high-income taxpayers were subject to a phaseout of certain itemized deductions — typically equal to 3% of the amount by which adjusted gross income exceeded a specific threshold. From 2018 through 2025, the TCJA removed this rule entirely.
The One Big Beautiful Bill Act (OBBBA) permanently eliminates the old limitation but replaces it with a new rule that applies only to individuals in the 37% federal tax bracket.
How the New Formula Works
Beginning in 2026, itemized deductions will be reduced by the lesser of:
• 2/37 × the amount of otherwise allowable itemized deductions, or
• 2/37 × the amount of taxable income (before itemized deductions) that exceeds the threshold for the 37% bracket.
Who Falls Into the Top Tax Bracket?
For 2026, the 37% bracket applies to taxable income above:
• $640,600 for single filers and heads of household
• $768,700 for married couples filing jointly
• $384,350 for married filing separately
Overall, the rule effectively reduces the tax benefit of itemized deductions so that high earners receive a benefit comparable to the 35% bracket rather than the 37% bracket.
Examples of the Deduction Limitation
Example 1
You have $37,000 in allowable itemized deductions in 2026. Before applying deductions, your taxable income exceeds the 37% threshold by $37,000.
Reduction: 2/37 × $37,000 = $2,000
Allowable deductions: $37,000 − $2,000 = $35,000
Tax benefit: $35,000 × 37% = $12,950 (equal to 35% of $37,000)
Example 2
You have $100,000 in itemized deductions in 2026. Before applying deductions, your taxable income exceeds the threshold by $1 million.
Reduction: 2/37 × $100,000 = $5,405
Allowable deductions: $100,000 − $5,405 = $94,595
Tax benefit: $94,595 × 37% ≈ $35,000 (equal to 35% of $100,000)
Tax Planning Strategies for 2025 and 2026
If you anticipate being in the 37% bracket in 2026, you have a valuable opportunity in 2025 to preserve your itemized deductions. Because the limitation won’t apply until 2026, accelerating deductible expenses this year may provide a larger benefit.
Planning Moves for 2025
• Make significant charitable contributions earlier than planned.
• Prepay state and local taxes (SALT), including property taxes, if you haven’t reached the deduction cap.
• Bunch medical expenses into 2025 if you’re near or above the 7.5% AGI threshold.
Planning Moves for 2026
Once the limitation is active, your goal should be to reduce the income that falls into the 37% bracket. Strategies may include:
• Harvest capital losses in taxable investment accounts.
• Increase contributions to deductible retirement plans.
• Delay Roth conversions that increase taxable income.
• If you operate a pass-through business (partnership, S corporation, LLC, or sole proprietorship), explore ways to lower taxable business income.
Will You Be Affected?
If your income in 2026 is likely to place you in the 37% bracket, the new limitation may reduce the value of your itemized deductions. Contact us to review your tax picture and determine strategic steps to reduce the impact.
© 2025