The 2025 tax reform legislation—formally known as the One Big Beautiful Bill—has introduced sweeping changes to itemized deductions, reshaping how millions of Americans calculate their taxable income. For the average taxpayer, these changes bring both relief and complexity, depending on income level, location, and filing status. What follows are a few highlights of the changes that affect taxpayers who itemize on their Federal tax returns.

1. State and Local Tax (SALT) Deduction Cap Raised—Temporarily

One of the most significant changes is the temporary increase in the SALT deduction cap. Previously capped at $10,000, the new law raises the limit to:

• $40,000 for most taxpayers
• $20,000 for married individuals filing separately

This expanded cap applies from 2025 through 2029, after which it reverts to the original $10,000/$5,000 levels.

However, the benefit is phased out for higher-income taxpayers. If your modified adjusted gross income (MAGI) exceeds $500,000 (or $250,000 for separate filers), your deduction is reduced by 30% of the excess, but never below the original $10,000/$5,000 minimum.

2. Adjustments to the Cap on Itemized Deductions

The Pease limitation, which previously reduced itemized deductions for high-income earners, has been permanently repealed. In its place, a new rule limits the value of itemized deductions for those in the top 37% tax bracket. Itemized deductions will be reduced by 2/37 of the lesser of (a) the amount of the deductions or (b) the taxable income that exceeds the dollar amount at which the 37% rate bracket begins.

3. Charitable Contributions: New Floor and Expanded Access

For taxpayers who itemize, a new 0.5% floor applies to charitable deductions. This means that the first 0.5% of your AGI in charitable contributions is not deductible, reducing the overall benefit for smaller donations.

On the flip side, taxpayers who claim the standard deduction can now claim an above-the-line charitable deduction of up to $1,000 (single) or $2,000 (joint), making charitable giving more accessible to those who take the standard deduction. The 0.5% floor does not apply to non-itemizers.

4. Miscellaneous Itemized Deductions

The OBBB made some substantial modifications to miscellaneous itemized deductions as detailed below:

1. Unreimbursed Expenses for Eligible Educators
   1. These are now explicitly allowed as itemized deductions for any expense in excess of the $300 above the line deduction.
   1. There is no limit to deductible eligible expenses
2. Wagering Losses
   1. Deductible up to 90% of the amount of losses, but only to the extent of gains from wagering transactions 
   1. This replaces the prior rule that allowed full deduction of wagering-related expenses up to the amount of winnings.
3. Personal Casualty Losses
   1. Deductible only if the loss is attributable to a federally or state-declared disaster 
   1. This permanently limits the deduction and excludes personal losses from theft, fire, or accidents unless officially declared.

For most middle-income taxpayers, especially those in high-tax states, the increased SALT cap offers meaningful relief.

However, higher-income taxpayers will see limited gains due to phaseouts and caps on deduction value. The new rules also introduce more nuanced calculations, requiring careful planning to optimize deductions. To learn more about how these changes impact you, contact your tax advisor at YHB.