Beginning in 2026, individuals in the highest federal income tax bracket will face a new cap on itemized deductions. If you anticipate falling into the 37% bracket, now is the time to take proactive steps to reduce your future tax burden.
🔍 Understanding the New Deduction Limitation
📜 A Brief History
Before the Tax Cuts and Jobs Act (TCJA), high-income earners saw their itemized deductions reduced by 3% of the amount their adjusted gross income (AGI) exceeded a set threshold. The TCJA suspended this rule from 2018 through 2025.
The One Big Beautiful Bill Act (OBBBA) makes that suspension permanent—but introduces a new limitation specifically for taxpayers in the 37% federal income tax bracket.
📉 How the New Rule Works
Starting in 2026, itemized deductions for those in the 37% bracket will be reduced by the lesser of:
- 2/37 × the total allowable itemized deductions, or
- 2/37 × the amount of taxable income (before deductions) that exceeds the 37% bracket threshold.
💰 2026 Income Thresholds for the 37% Bracket
- Single filers & heads of household: $640,600
- Married filing jointly: $768,700
- Married filing separately: $384,350
In effect, this change reduces the value of itemized deductions for top earners to what they would receive under the 35% bracket.
📊 Examples: How the Limitation Applies
Example 1
- Itemized deductions: $37,000
- Taxable income above threshold: $37,000
- Reduction: 2/37 × $37,000 = $2,000
- Final deductions: $35,000
- Tax benefit: 37% × $35,000 = $12,950 (equivalent to 35% of $37,000)
Example 2
- Itemized deductions: $100,000
- Taxable income above threshold: $1,000,000
- Reduction: 2/37 × $100,000 = $5,405
- Final deductions: $94,595
- Tax benefit: 37% × $94,595 = $35,000 (equivalent to 35% of $100,000)
💡 Tax Planning Strategies to Consider
✅ Take Action Before 2026
Since the new limitation doesn’t apply until 2026, you have a window of opportunity in 2025 to maximize deductions:
- Accelerate Charitable Giving: Make large donations in 2025 rather than waiting.
- Prepay SALT Taxes: If you’re under the SALT cap, consider paying 2026 property taxes in 2025.
- Bunch Medical Expenses: If you’re near the 7.5% AGI threshold, consolidate medical costs into 2025.
✅ Reduce 2026 Taxable Income
To avoid or minimize the impact of the deduction cap in 2026, consider:
- Harvesting capital losses from taxable investments
- Increasing contributions to deductible retirement accounts
- Delaying Roth conversions
- Adjusting income from pass-through entities or sole proprietorships
📞 Will You Be Affected?
If your projected 2026 income places you in the 37% bracket, now is the time to act. Strategic planning in 2025 can help preserve your deductions and reduce your tax liability. Consult with a tax advisor to explore your options.