Since our prior installment in the One Big Beautiful Bill Act Analysis Series was published just days after the One Big Beautiful Bill Act (OBBBA) was signed into law, there have been noteworthy updates to the OBBBA's changes that affect individual taxpayers and their estate planning. In this alert, we provide a summary of notable changes, including analysis and key details regarding state and local tax (SALT) and charitable deductions, as well as the new "2/37 reduction" of itemized deductions for taxpayers in the highest income bracket.
SALT Deduction
The SALT deduction allows taxpayers to deduct certain state and local taxes from their federal income taxes. Taxes that qualify for the SALT deduction include state and local income taxes, real estate taxes and certain personal property taxes. The OBBBA raised the cap on SALT deductions from $10,000 to $40,000, with the cap scheduled to increase by 1 percent annually from 2026 through 2029. The cap will then revert to $10,000 in 2030.
For single filers with an adjusted gross income (AGI) over $250,000 and joint filers with an AGI over $500,000, the allowable SALT deduction is reduced by $0.30 for every $1 of AGI over that threshold, incrementally reducing the available deduction to a minimum of $10,000. Accordingly, single filers with an AGI between $250,000 and $350,000, and joint filers with an AGI between $500,000 and $600,000 will have a reduced SALT deduction between $10,000 and $40,000, and filers above those ranges will be limited to a $10,000 SALT deduction.
Example scenarios:
- A couple filing jointly with an AGI of $450,000 qualifies for a $40,000 SALT deduction.
- A couple filing jointly with an AGI of $550,000 exceeds the $500,000 threshold by $50,000. At $0.30 per dollar, their deduction is reduced by $15,000, meaning they would qualify for a $25,000 SALT deduction.
- A couple filing jointly with an AGI of $650,000 would only be entitled to the $10,000 SALT deduction.
Charitable Deduction
Beginning in 2026, the OBBBA provides an above-the-line charitable deduction of up to $1,000 for single filers and $2,000 for joint filers. Taxpayers claiming the standard deduction can claim this benefit without itemizing. However, this above-the-line deduction is only available to those taxpayers claiming the standard deduction.
For those itemizing, the OBBBA imposes a new 0.5 percent of AGI floor on charitable deductions. As a result, charitable gifts up to 0.5 percent of an individual's AGI no longer qualify for a charitable deduction. For example, an individual with an AGI of $250,000 would receive no deduction for the first $1,250 of charitable contributions made in the year. An individual with an AGI of $1,100,000 would receive no deduction for the first $5,500 of charitable contributions made in the year.
Though it is not explicitly stated in the OBBBA, the assumption is that the 0.5 percent floor will apply to any contributions carried into 2026 and beyond. Practitioners are waiting for guidance to confirm this.
In addition, the OBBBA permanently extended the existing cap set by the Tax Cuts and Jobs Act on charitable deductions. This allows individuals to deduct 60 percent of AGI for cash gifts to qualified public charities. This is a continuation of the rules put in place in 2017 and should not result in any change to taxpayers' current charitable giving strategy.
2/37 Limitation
Beginning in 2026, the OBBBA places a limit on itemized deductions for taxpayers subject to the highest marginal income tax bracket, currently 37 percent. The 37 percent bracket begins at a taxable income of $626,350 for single filers, $751,600 for joint filers, and $15,650 for estates and trusts.
Taxpayers subject to this limitation must reduce most itemized deductions by a fraction of 2/37 (approximately 5.4 percent).
Specifically, this reduction applies to itemized deductions other than the Qualified Small Business Income deduction and the SALT deduction discussed above, which is governed by its own phase-out rules and $10,000 floor. That means the 2/37 reduction will apply to deductions such as mortgage interest, charitable donations and legal/accounting fees in the case of trusts and estates.
For example, a trust in the 37 percent income tax bracket that paid $50,000 in deductible legal and accounting fees would be limited to claiming a $47,300 deduction (losing $2,700 of a deduction).
Taxpayers subject to the 2/37 reduction will have their charitable deductions reduced by both the 2/37 reduction and the 0.5 percent AGI charitable deduction floor mentioned above. For example, if a single individual has an AGI of $650,000 (putting him in the 37 percent bracket) and he makes a $50,000 charitable donation, the first $3,250 is no longer deductible due to the new 0.5 percent floor. This would leave him with a $46,750 charitable deduction; however, the deduction is further reduced by 2/37 (or 5.4 percent), making an additional $2,524 non-deductible. This leaves the taxpayer with a charitable deduction of $44,226 on the $50,000 charitable gift.
Estate Planning Outlook
All taxpayers who itemize, and especially those facing the top marginal tax rate, should consider making charitable gifts in 2025 before these changes come into effect in 2026.
Further, taxpayers facing the top marginal tax rate should consider whether they may be in a lower tax bracket in subsequent tax years. If so, strategically planning charitable gifts for lower tax bracket years will maximize the charitable deduction on that gift by avoiding the 2/37 reduction.
Trusts and estates that deduct expenses for professional fees may consider pre-paying upcoming expenses in 2025. This will maximize the deduction for those expenses and keep them from being subject to the 2/37 reduction in 2026.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
