New Rules for Itemized Deductions: What You Need to Know
The One Big Beautiful Bill Act (OBBBA) introduced sweeping changes to the tax code. While most headlines focused on corporate rates and clean energy, several important updates were made to itemized deductions that will impact millions of individual taxpayers beginning in the 2025 tax year.
Whether you itemize every year or are still weighing whether it makes sense for your situation, here is what you need to know.
New Car Loan Interest Deduction
One of the more noteworthy additions is the temporary deduction for car loan interest. Starting in 2025, taxpayers may deduct up to $10,000 per year in interest paid on new vehicle loans. To qualify, the vehicle must be for personal use, must be assembled in the United States, and the loan must originate after December 31, 2024.
There are income phaseouts to keep in mind. The deduction begins to phase out for taxpayers with modified adjusted gross income (MAGI) over $100,000 for individuals and $200,000 for married couples filing jointly. This provision is set to expire after 2028.
Updates to Charitable Contribution Deductions
Charitable giving has also received a makeover. Beginning in 2026, non-itemizers can now deduct up to $1,000 (single) or $2,000 (married filing jointly) in charitable contributions as an above-the-line deduction.
For those who itemize, a new 0.5 percent of AGI floor must be met before charitable deductions can be claimed. This means that if your adjusted gross income is $150,000, your charitable contributions must exceed $750 before any deduction kicks in.
High earners will also see the marginal benefit of itemized charitable deductions capped. Taxpayers in the highest income bracket may not receive the full tax benefit they previously enjoyed. This change is designed to limit the deduction’s value at the top end while maintaining the structure for the majority of filers.
Itemized Deductions Subject to New Limitation
The OBBBA permanently repeals the old “Pease” limitation on itemized deductions, but starting in 2026 it introduces a new overall limitation. This provision applies only to taxpayers in the highest income tax bracket (currently 37%). For these individuals, the total tax benefit of itemized deductions will be effectively capped at 35%.
In practice, this means that while deductions are still permitted, the savings they generate will be reduced at the top end. High-income taxpayers who rely heavily on deductions for charitable giving, mortgage interest, or state and local taxes may find that their overall benefit is smaller than before.
For those affected, careful tax planning will become even more important. Reviewing deduction strategies in advance and considering the timing of charitable contributions or other deductible expenses can help mitigate the impact of this new rule.
What Did Not Return: Miscellaneous Deductions
Despite calls from tax professionals and small business advocates, miscellaneous itemized deductions were not restored. This includes common expenses such as:
- Investment advisory fees
- Tax preparation fees
- Unreimbursed employee expenses
- Union dues
- Certain legal fees not related to business or income production
These deductions were suspended under the 2017 Tax Cuts and Jobs Act and are now permanently eliminated under the OBBBA.
Tax Planning Implications
The revised landscape for itemized deductions means that the decision to itemize versus claiming the standard deduction will remain a year-by-year calculation for many taxpayers. Strategies worth considering include:
- Bunching charitable contributions to exceed the AGI threshold in a single year
- Timing major purchases, like new vehicles, to align with years where itemizing may provide more benefit
- Reviewing your AGI and income thresholds to determine eligibility for new deductions
- Coordinating with a tax advisor to maximize deductions in years where your income or expenses fluctuate
Bottom Line
The OBBBA introduces several changes that reshape the value and structure of itemized deductions. While the car loan interest deduction and expanded options for charitable giving offer new opportunities, new limitations for high earners mean added complexity.
Contact your ShindelRock team to take a fresh look at your deduction strategy now, while there is still time to plan ahead.