The One Big Beautiful Bill Act (OBBBA) has lots of good news for individual taxpayers, but some mixed news if you itemize deductions.
Here’s what you need to know to win under the OBBBA changes that affect itemizers.
Disallowance of Miscellaneous Itemized Deductions Made Permanent
For 2018-2025, the Tax Cuts and Jobs Act (TCJA) suspended miscellaneous itemized deductions that were previously allowed subject to a 2 percent of adjusted gross income (AGI) floor.
The OBBBA converted that temporary suspension into a permanent repeal.1
Perhaps the most important impact of this unfavorable development applies if you have unreimbursed employee business expenses or investment expenses. For 2026 and beyond, miscellaneous itemized deductions for these expenses are permanently banned by the OBBBA.
As a member reading our material, you know that the solution to the employee expense disallowance is to have your corporation reimburse the expenses.
Here are two articles to refresh your memory on this subject:
- The One-Way Ticket to the Corporate Owner’s Home-Office Deduction
- TCJA: Don’t Lose Out When Corp. Vehicle Is in Your Personal Name
You Can Still Claim Itemized Deductions for Other Expenses
As an individual taxpayer, you can still claim itemized deductions on Schedule A of your Form1040 for the following items, among others (subject to applicable limitations), that were not classified as miscellaneous itemized deductions subject to the 2-percent-of-AGI deduction floor before the TCJA and the OBBBA:2
- Interest expense
- Taxes
- Personal casualty and theft losses
- Contributions to IRS-approved charities
- Medical expenses, including health insurance premiums
- Federal estate tax liability due to income in respect of a decedent
New Itemized Deduction Reduction for Higher-Income Individuals
For 2018-2025, the TCJA suspended the old-law limitation on itemized deductions for higher-income taxpayers.
The OBBBA makes that suspension permanent—except for taxpayers in the 37 percent tax bracket.
Starting in 2026, allowable itemized deductions for those high-income individuals will be reduced by the lesser of3
- 2/37 times the amount of otherwise allowable itemized deductions or
- 2/37 times the amount of taxable income—increased by the amount of otherwise allowableitemized deductions—in excess of the applicable threshold for the 37 percent tax bracket.
Example 1. In 2026, Obi Wan has $37,000 of otherwise allowable itemized deductions. Beforeconsidering his otherwise allowable itemized deductions, his 2026 taxable income exceeds the threshold for the 37 percent federal income tax bracket by $37,000.
Obi Wan’s otherwise allowable itemized deductions will be reduced by $2,000 (2/37 x $37,000 = $2,000). So, his allowable itemized deductions will be $35,000 ($37,000 - $2,000).
That amount will deliver a tax benefit of $12,950 (37 percent x $35,000 = $12,950), which is 35 percent of $37,000.
Example 2. This time assume that Obi Wan wins a $2 million lottery jackpot in December 2026. He has $100,000 of otherwise allowable itemized deductions.
Before considering his otherwise allowable itemized deductions, his 2026 taxable income exceeds thethreshold for the 37 percent bracket by $1.95 million. His otherwise allowable itemized deductions will be reduced by $105,405 (2/37 x $1,950,000 = $105,405), but cannot be below zero. So, his allowable itemized deductions are wiped out.
Although Obi Wan could avoid this dire tax outcome by not turning in his winning lottery ticket, we don’t recommend that.
The Impact
As the examples illustrate, starting in 2026, the provision for this new itemized deduction reduction limits the tax benefit of itemized deductions to no more than 35 percent.
Tax Planning
The plan is simple. Executing the plan might not be so simple.
Try to avoid having taxable income that crosses the threshold into the 37 percent tax bracket. There are potential ways to do that, but that’s another story.
For 2025, the 37 percent bracket starts when taxable income exceeds $626,350 if you’re a single filer; $751,600 if you’re a married joint-filer; $626,350 if you’re a head of household; or $375,800 if you used married-filing-separate status.The 37 percent bracket thresholds for 2026 will be somewhat higher due to annual inflation adjustments.
Takeaways
The OBBBA brings permanent changes that itemizers need to navigate carefully.
While the repeal of miscellaneous itemized deductions eliminates common write-offs like unreimbursed business and investment expenses, several major deductions remain intact—such as mortgage interest, taxes, medical expenses, and charitable contributions.
But starting in 2026, high-income taxpayers in the 37 percent bracket will face a reduction in the value of their itemized deductions, capping the benefit at no more than 35 percent.
The winning strategy: eliminate your employee expenses by having your corporation reimburse them, and plan ahead to manage taxable income levels that push you into the 37 percent bracket.
1 IRC Section 67(h).
2 See IRC Section 67(b) for the full list.
3 IRC Section 68(a).