OBBBA Updates Itemized Deduction & Charitable Contribution Rules

Following the One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025, taxpayers will see significant adjustments to itemized deductions and charitable contributions. At KB Financial Planning LLC, we’re dedicated to helping you understand these new tax laws to optimize your tax planning strategy and maximize your tax savings.

The OBBBA introduces both new limitations for higher earners and new opportunities for charitable giving, calling for a close look at your individual and business financial picture.

New limitations on itemized deductions

While the Tax Cuts and Jobs Act (TCJA) of 2017 suspended the “Pease” limitation on itemized deductions, the OBBBA reintroduces a new form of limitation for high-income taxpayers.

Key changes to overall itemized deductions (effective for tax years beginning after December 31, 2025)

  • For taxpayers in the 37% tax bracket, the effective tax benefit of their otherwise allowable itemized deductions will be capped at a 35% tax rate. This means that each dollar of itemized deductions for these taxpayers will provide a reduction in taxable income at a maximum 35% rate, rather than their full 37% marginal rate.
  • While complex, this limitation essentially reduces the value of your total itemized deductions if your taxable income exceeds the threshold for the 37% tax bracket. For example, a $1,000 deduction for a 37% bracket taxpayer would now only save $350 in taxes, not $370.
  • The OBBBA permanently eliminates the old “Pease” limitation, which was set to be restored. This new cap replaces it.

Other itemized deduction considerations

It’s also important to note that the OBBBA permanently eliminates miscellaneous itemized deductions which were previously suspended. This includes deductions for unreimbursed employee expenses, tax preparation fees, and investment expenses. The OBBBA also retains the $750,000 mortgage interest deduction limit and clarifies that mortgage insurance premiums can now qualify as deductible interest beginning in 2026.

Significant changes to charitable contributions

The OBBBA brings several notable changes to how charitable contributions are treated, aiming to balance new incentives with limitations, particularly for higher-income donors. These provisions are generally effective for tax years beginning after December 31, 2025.

1. New above-the-line deduction for non-itemizers

  • For the first time, permanently, individuals who do not itemize their deductions can claim an “above-the-line” deduction for cash contributions to qualified charities.
  • Up to $1,000 for single filers and $2,000 for married couples filing jointly.
  • This deduction does not apply to contributions made to donor-advised funds or supporting organizations.

2. New AGI floor for itemized charitable deductions

  • For taxpayers who itemize their deductions, charitable contributions will only be deductible to the extent they exceed 0.5% of their Adjusted Gross Income (AGI).
  • Example: If your AGI is $400,000, the first $2,000 ($400,000 * 0.005) of your qualified charitable donations will not be deductible.
  • This new “floor” may encourage individuals to “bunch” their donations into a single year to exceed the threshold more easily.

3. Maximum benefit cap for high-income itemizers (charitable gifts)

  • Similar to the overall itemized deduction limitation, for individuals in the 37% tax bracket, the maximum tax benefit from a charitable contribution deduction will be capped at a 35% tax rate. This means the tax savings from their charitable giving will be limited to 35 cents on the dollar, even if their marginal income tax rate is 37%.

4. Permanency of the 60% AGI limit for cash contributions

  • The provision allowing cash contributions to public charities to be deducted up to 60% of AGI (rather than the previous 50% limit) has been made permanent. This offers more flexibility for substantial cash donations.

5. Corporate charitable deduction floor

  • Corporations can now only deduct charitable contributions that exceed 1% of their taxable income, up to the existing 10% ceiling. Excess contributions can be carried forward for up to five years.

6. New scholarship granting organization (SGO) tax credit (Effective for tax years ending after December 31, 2026)

  • A new nonrefundable tax credit of up to $1,700 is available for individuals making contributions to qualified 501(c)(3) public charities designated as Scholarship Granting Organizations (SGOs).

Personalized tax planning

The OBBBA’s revisions to itemized deductions and charitable contributions underscore the increasing complexity of federal tax law. These changes, alongside other new provisions like the increased standard deduction and new above-the-line deductions for seniors, qualified tips, and car loan interest (effective for 2025-2028), make proactive tax planning more important than ever.

At KB Financial Planning LLC, we specialize in providing comprehensive and personalized tax preparation and financial planning services. We can help you:

  • Analyze your itemizing strategy to determine if itemizing still benefits you given the new limitations and the higher standard deduction.
  • Optimize your charitable giving and develop strategies to maximize the tax efficiency of your donations under the new AGI floor and benefit caps.
  • Navigate the new deduction landscape and understand how all the OBBBA changes, including new specific deductions, apply to your unique financial situation.
  • Minimize your tax liability by exploring every opportunity to reduce your federal and state tax burden legally and effectively.

Don’t let these new tax laws create uncertainty. Partner with KB Financial Planning LLC to gain clarity and ensure your financial strategies are aligned with the latest regulations. Contact us today for a consultation and take control of your 2025 tax planning and beyond.