Deductions & Credits for Individual Taxpayers
2026 U.S. Tax Rules — OBBBA Updated

Overview & OBBBA Context

Deductions reduce taxable income; credits reduce tax owed dollar-for-dollar. The 2026 tax landscape for deductions was fundamentally reshaped by the OBBBA — but not in the direction that prior "sunset" projections described. The TCJA did not expire; the OBBBA made most provisions permanent while introducing a new set of OBBBA-specific changes effective January 1, 2026.

Standard Deduction 2026

The standard deduction is the automatic baseline reduction of taxable income available to all taxpayers who do not itemize. The OBBBA permanently extended and inflation-adjusted the TCJA-era higher standard deductions.

Itemized Deductions — Schedule A

Taxpayers who itemize instead of taking the standard deduction must complete Schedule A and attach it to Form 1040. Itemizing is beneficial only when total allowable itemized deductions exceed the standard deduction. With the 2026 SALT cap raised to $40,400, taxpayers in high-tax states may find itemizing more advantageous than in prior years.

2026 Itemized Deduction Summary — OBBBA Rules

SALT — $40,400 Cap (2026)

The state and local tax (SALT) deduction covers state income taxes (or sales taxes), local income taxes, and property taxes paid during the year. Under TCJA, the SALT deduction was capped at $10,000. The OBBBA temporarily raised this cap for 2025–2029, with 1% annual increases, before reverting to $10,000 in 2030.

SALT Cap Schedule — 2025 through 2030

High-Income Phase-Out (2026)

• The $40,400 cap is reduced by 30% of the amount by which MAGI exceeds $505,000 in 2026. For every $10,000 of MAGI above $505,000, the cap is reduced by $3,000.
• The cap reaches the $10,000 floor when MAGI exceeds approximately $606,333 in 2026 — at that point, the SALT deduction is limited to $10,000 regardless of actual taxes paid.
• The floor never drops below $10,000. The phase-out cannot reduce the cap below the original TCJA limit.

Mortgage Interest

Mortgage interest on acquisition debt is deductible as an itemized deduction on Schedule A. The OBBBA permanently established the TCJA limits — the pre-TCJA $1 million limit did not return in 2026.

• Acquisition debt limit — post-December 15, 2017 mortgages: Interest deductible on the first $750,000 of acquisition debt ($375,000 MFS). This limit is now permanent under OBBBA.
• Pre-December 15, 2017 mortgages (grandfathered): Interest deductible on the first $1,000,000 of acquisition debt. The grandfathered higher limit applies to loans originated on or before December 15, 2017.
• Home equity loan interest: Deductible only when loan proceeds are used to buy, build, or substantially improve the taxpayer's primary residence or second home, and total debt (acquisition + home equity) does not exceed $750,000. Interest on home equity loans used for personal expenses (debt consolidation, car purchase, tuition) remains non-deductible.
• Mortgage insurance premiums (PMI) — reinstated 2026: OBBBA permanently reinstates the deduction for qualified mortgage insurance premiums on acquisition debt. AGI phase-out: $100,000–$150,000 (single) / $200,000–$250,000 (MFJ). Fully phased out above the upper threshold.

Charitable Contributions

The OBBBA introduced two significant new restrictions on charitable deductions effective January 1, 2026, while also creating a new benefit for non-itemizers. Both changes require immediate planning adjustments for regular donors.

New 0.5% AGI Floor (Effective 2026)

• Beginning in 2026, itemized charitable deductions are allowed only to the extent they exceed 0.5% of AGI. The first 0.5% of AGI in charitable contributions is permanently disallowed — there is no carryforward for amounts below the floor.
• Example: AGI $500,000 → 0.5% floor = $2,500. Only contributions above $2,500 are deductible. A $2,000 total donation generates zero deduction; a $10,000 donation generates a $7,500 deduction.
• For most middle-income taxpayers, the floor is small ($300–$800 on AGI of $60,000–$160,000). For high-income taxpayers, the floor is more material but remains a modest portion of typical charitable giving.

37% Bracket Charitable Cap — 35¢ per Dollar

• For taxpayers in the 37% bracket, the effective benefit of all itemized deductions (including charitable contributions) is capped at 35% per dollar under the 2/37 rule (see Section 8). A $100,000 charitable gift generates at most $35,000 in tax savings — not $37,000.
• This affects high-income donors who previously benefited from the full 37% rate on charitable deductions. The combined effect of the 0.5% floor and the 35% cap significantly changes the economics of large charitable gifts in 2026 vs. 2025.

Non-Itemizer Charitable Deduction — New in 2026

• Taxpayers who take the standard deduction (do not itemize) can now deduct cash charitable contributions of up to $1,000 (single) / $2,000 (MFJ) as an above-the-line adjustment.
• Applies only to cash contributions to qualifying operating charities. Does not apply to: donations of appreciated property, contributions to private foundations, contributions to donor-advised funds.

2026 Charitable Deduction Limits — Summary

Medical Expenses

• Unreimbursed medical expenses are deductible to the extent they exceed 7.5% of AGI. The 7.5% floor is permanent under OBBBA (it was temporarily set at various levels before TCJA established 7.5% as the standard).
• Qualifying expenses include: medical and dental care, vision, prescription medications, long-term care premiums (subject to age-based limits), health insurance premiums not already deducted elsewhere, and medically necessary equipment and transportation to care facilities.
• Expenses reimbursed by insurance, HSA, or FSA distributions do not qualify — only the unreimbursed out-of-pocket portion is deductible.
• Planning strategy — bunching: Because of the 7.5% AGI floor, medical deductions often produce no benefit in any individual year. Concentrating elective medical procedures, dental work, or vision expenses into a single calendar year — to exceed the threshold in one year rather than spread across two — maximizes the deduction in the bunching year.

37% Bracket Itemized Deduction Cap — The 2/37 Rule

The OBBBA introduced a new permanent limitation on itemized deductions for taxpayers in the top 37% bracket, effective January 1, 2026. This replaces the Pease limitation that was suspended by TCJA and was scheduled to return in 2026.

How It Works

• For taxpayers with taxable income in the 37% bracket, total itemized deductions are reduced by 2/37 of the lesser of: (1) total itemized deductions or (2) taxable income above the 37% bracket threshold.
• In practical terms: the maximum tax benefit of any itemized deduction for a 37% bracket taxpayer is 35 cents per dollar(37% − 2% effective reduction = 35%). A $100,000 total itemized deduction saves $35,000 in tax, not $37,000.
• The QBI deduction under §199A is excluded from this limitation — pass-through business owners in the 37% bracket can still claim the full QBI deduction without reduction.
• This limitation applies to all other itemized deductions: SALT, mortgage interest, charitable contributions, medical expenses, and any remaining deductible items.

Above-the-Line Deductions

Above-the-line deductions reduce gross income to arrive at AGI — they are available regardless of whether the taxpayer itemizes or takes the standard deduction, and they reduce AGI itself, which in turn affects credit eligibility, MAGI thresholds, and the value of itemized deductions that are AGI-limited.

Major Tax Credits

Credits reduce tax liability dollar-for-dollar — they are more valuable than equivalent deductions. A $2,500 tax credit saves $2,500 in tax; a $2,500 deduction saves $2,500 × marginal rate (e.g., $550 at 22%).

Child Tax Credit (CTC) — 2026

• $2,200 per qualifying child(OBBBA increased from $2,000; inflation-adjusted after 2026). Child must be under 17 at end of the tax year.
• Refundable portion (Additional CTC): Up to $1,700 per child is refundable — meaning it can produce a refund even if tax liability is zero.
• Phase-out: Begins at $400,000 (MFJ) / $200,000 (single). Reduces by $50 for each $1,000 of income above the threshold.

American Opportunity Tax Credit (AOTC)

• Up to $2,500 per student for the first four years of post-secondary education. 100% of first $2,000 in qualifying expenses + 25% of next $2,000 = maximum $2,500.
• 40% refundable (maximum $1,000 refundable). Requires Form 1098-T from the educational institution.
• MAGI phase-out:$80,000–$90,000 (single) / $160,000–$180,000 (MFJ). Cannot be claimed once the student has completed four years of higher education.

Lifetime Learning Credit (LLC)

• Up to $2,000 per return(not per student). 20% of up to $10,000 in qualifying education expenses. Available for any year of post-secondary education — not limited to first four years.
• MAGI phase-out:$80,000–$90,000 (single) / $160,000–$180,000 (MFJ). Cannot be claimed in the same year as AOTC for the same student.

Earned Income Credit (EIC / EITC)

• Available to lower-to-moderate income taxpayers with earned income. Maximum credit: $8,231 (3+ children) / $7,316 (2 children) / $4,427 (1 child) / $664 (no children) in 2026.
• Refundable — can produce a refund even when no income tax is owed. Phase-out depends on filing status, number of children, and earned income level.

Energy Credits — 2026 Changes

MAGI Phase-Outs Summary — 2026

Step-by-Step Guidance

Practical Examples

Common Mistakes

• 1 Using pre-OBBBA sunset projections for 2026 deductions. The TCJA sunset did not occur. The standard deduction did not revert to ~$7,550. Miscellaneous itemized deductions were not restored. Mortgage interest did not revert to $1M. Any analysis prepared before July 2025 that assumed a sunset requires complete revision.
• 2 Not itemizing when the $40,400 SALT cap makes it beneficial. The SALT cap increase from $10,000 to $40,400 in 2026 meaningfully changes the standard vs. itemized calculation for taxpayers in high-tax states. Taxpayers who defaulted to the standard deduction under the $10,000 SALT limit should recalculate every year through 2029.
• 3 Ignoring the 0.5% charitable AGI floor when calculating deductions. Small charitable donations (below 0.5% of AGI) generate zero deduction in 2026. A taxpayer with $200,000 AGI who donates $800 receives no charitable deduction — the first $1,000 (0.5% of $200,000) is non-deductible.
• 4 Deducting miscellaneous itemized expenses. These were permanently eliminated by OBBBA. Tax preparation fees, investment advisory fees, unreimbursed employee expenses, and union dues are not deductible — not in 2026, and not in future years. The prior projections of restoration were incorrect.
• 5 Claiming home equity loan interest without confirming use of proceeds. Interest on home equity loans is deductible only if proceeds were used to buy, build, or substantially improve the home. Interest on home equity loans used for personal purposes (debt consolidation, tuition, vehicles) is permanently non-deductible.
• 6 Missing the non-itemizer charitable deduction. Taxpayers who take the standard deduction in 2026 can still deduct up to $1,000 (single) / $2,000 (MFJ) in cash charitable contributions as an above-the-line adjustment. This is a new OBBBA benefit that was not available in prior years.
• 7 Not bunching medical expenses. The 7.5% AGI floor eliminates most medical deductions in any individual year for moderate-income taxpayers. Scheduling elective procedures, dental work, and vision care in a single year to exceed the floor — rather than spreading them across two years — can produce a meaningful deduction that would otherwise be entirely unavailable.
• 8 Not confirming energy credit status before installation. The Inflation Reduction Act energy credits that were widely used in 2023–2025 were modified by OBBBA. Taxpayers installing solar, EV chargers, or other energy equipment in 2026 should confirm current credit availability with a tax advisor before assuming the same credits from prior years still apply at the same rates.

Hanmi CPA Insight