US tax year end actions - deductions and the OBBBA

A US taxpayer may choose each year to either claim a standard deduction, which is a fixed amount that may be deducted against income based on the tax return filing status, or an itemised deduction, which is an amount dependant on the type of allowable expenses incurred by the taxpayer in the year.

The OBBBA makes permanent the temporary increases in the standard deduction provided under President Trump’s tax reform that were enacted during his previous administration in 2017 and were in effect for tax years 2018 to 2025. Had this not been made permanent it would have defaulted back down to circa $6,500 for individual filers, $13,000 for joint returns, and $9,550 for heads of household (before indexing for inflation), which would have resulted in either less deductibility for taxpayers, or a drive to shift more taxpayers electing to itemise their deductions (subject to limitations - noted below).

Taxpayers should project their 2025 deductions now to determine whether ‘bunching’ itemisable deductions into the current year provides a benefit, or whether it may be better to delay certain deductions, such as charitable contributions, into a future year.

For example, if a taxpayer’s itemised deductions are close to the new standard deduction threshold, accelerating deductible expenses (such as medical expenses, property taxes or charitable gifts) into one year may allow them to itemise in that year and take the standard deduction in the next, maximising overall tax savings across both years.

From 2026 a number of deductions that had been temporarily suspended and were due to reappear, following 2017 tax reform, have been permanently repealed by the OBBBA – these include miscellaneous itemised deductions such as unreimbursed employee expenses, tax preparation fees and investment expenses, as well as the personal exemption (other than a temporary senior deduction of $6,000 deduction per qualifying individual age 65 or older). Again, this may result in more taxpayers utilising the standard deduction going forward.

A new limitation for the highest earners (i.e. those with taxable income in the 37 percent bracket) will apply from 2026. Under this provision, itemised deductions will be reduced by 2/37 of the lesser of total itemised deductions or taxable income in the 37 percent bracket. This effectively reintroduces a ‘Pease-like’ limitation that had been suspended under the 2017 tax reform, targeting high-income taxpayers and reducing the benefit of itemising for those with substantial income.

High-income taxpayers should consider the timing of both their income and deductions to minimise the impact of this new limitation. For instance, deferring income/gains to a later year or accelerating deductions into a year when income is below the threshold may help preserve the value of itemised deductions. Additionally, taxpayers should be mindful of the interaction between this limitation and other deduction phaseouts, as the combined effect could be significant.

Under current law, cash contributions to qualified charitable organisations are generally deductible up to 60 percent of an individual’s adjusted gross income (AGI), while noncash property contributions (such as appreciated assets) are typically limited to 50 percent or 30 percent of AGI, depending on the type of property and recipient organisation. For noncash property, the deduction is usually the fair market value, but may be reduced by any appreciation if donated to certain private foundations or if the property is not used for the charity’s exempt purpose.

The OBBBA introduces a notable change for non-itemisers, allowing an above-the-line deduction of up to $1,000 ($2,000 for joint filers) for charitable contributions, beginning in 2026. This deduction reduces gross income and is available even to those who claim the standard deduction, providing a modest incentive for charitable giving regardless of itemisation status.

For itemisers, the rules are more complex. Beginning in 2026, only charitable contributions exceeding 0.5 percent of adjusted gross income (AGI) are deductible, and 2025 represents the last opportunity for taxpayers to maximise the deductibility of their charitable gifts under the current rules (which have no such floor). This ‘floor’ means that smaller charitable gifts may not yield any tax benefit for non-itemisers unless their total giving surpasses the threshold. High earners, in particular, may find it challenging to exceed this floor, especially if their charitable giving is spread out over several years. As a result, ‘bunching’ charitable contributions into a single year or utilising donor-advised funds (DAFs) can help increase the deduction.

DAFs may prove useful as they may allow taxpayers to make a large, deductible contribution in one year (exceeding the 0.5 percent AGI floor), while distributing grants to various charities over time. For those US taxpayers who are UK tax resident, making contributions to a dual-qualifying charity/DAF will be an important consideration to ensure tax relief can be claimed in both jurisdictions.

It is worth noting, however, that where charitable contributions (cash or noncash) exceed the applicable percentage limits for the year, taxpayers may carry the excess amount forward to each of the next five years, until it is used up. Whilst the OBBBA introduces several significant changes to the charitable contribution deduction regime, it does not alter the fundamental five-year carryover period for excess contributions.

The SALT deduction and its limitations were heavily debated as the legislation was passed between the House and the Senate with the allowable amount changing across the various drafts. The final Bill increased the cap for 2025 to $40,000 for single and joint filers ($20,000 for married filing separately (MFS) filers), indexed for inflation through to 2029. This is a significant increase from the $10,000 cap taxpayers had become used to since the major reduction introduced by the 2017 tax reform. This increase will be welcomed by many taxpayers in high-tax states such as California, New York and New Jersey. However, the benefit is not unlimited: the cap is subject to a phasedown by 30 percent of the excess modified AGI above $500,000 or ($250,000 for MFS), with a minimum deduction of $10,000 ($5,000 for MFS) allowable. The cap and the threshold will increase by 1 percent per annum. After 2029, the cap is set to revert down to $10,000. Therefore, taxpayers with modified AGI in excess of $600,000 will not benefit from this cap increase, given the phasedown, and will instead have a maximum SALT deduction of $10,000.

Taxpayers anticipating higher income in the following tax year should estimate their AGI to determine if the phaseout will reduce their SALT deduction cap. For those who pay state taxes in quarterly instalments, it may be optimal to accelerate payment of the fourth-quarter instalment, due 15 January of a given year, before year-end to increase the deduction, especially if the phaseout will apply in the following year. Additionally, taxpayers should be aware of the interplay between the SALT deduction and the new limitation on itemised deductions for high earners, as both could impact the overall benefit.

We work with our US clients every year to identify aspects of tax law to consider as the US tax year ends – for instance, recognising gains or losses to manage their net capital gains tax position, computing foreign tax credit shortfalls to ensure alignment of credits and mitigating double taxation/cash flow issues, as well as use of the annual gift allowance (which is $19,000 per donor per recipient for US citizens and domiciliaries for 2025 and remains at that level for 2026).

Prior to the passing of the OBBBA the lifetime gift and estate tax exemption amount of $13.99 million was due to sunset as of 31 December 2025 to less than half of this amount – impressing a need for action in advance of this date. However, the OBBBA instead increased the exemption to $15 million (to be indexed annually) and has made this ‘permanent’ such that there is no current sunsetting provision. This development may reduce the need for immediate action; however, we would recommend that this is regularly reviewed.

This year, given the new floors and limitations, the timing of income and expenses is more important than ever as some of these changes will apply for 2025, for example the increased SALT cap, whilst others commence in 2026, such as the limitation on itemised deductions and 0.5 percent charitable contribution floor.

Taxpayers should carefully document deductible expenses and consider ‘bunching’ as well as acceleration or deferral of items such as charitable contributions, State and Local tax payments, and medical expenses to exceed applicable thresholds and improve deductions. Changes in deduction rules may also affect overall tax liability and withholding needs, so taxpayers should review their withholding and estimated tax payments to ensure these are appropriate.

Finally, it is important to remember that all tax advice should be based on the facts and circumstances of a given individual/family. The interaction of the OBBBA’s provisions with each taxpayer’s unique circumstances, including income level, tax residency and credits (state and overseas), and charitable giving patterns, etc means that personalised advice is always essential. 

For further information please contact:

• James Murray
• Oliver Rooney