Introduction
Itemized deductions reduce US federal taxable income, and 2026 brings tighter rules. The One Big Beautiful Bill Act (Pub. L. 119-21), enacted July 4, 2025, adds a new overall limit for taxpayers reaching the top 37% bracket, plus a charitable floor and several category-specific changes.
This guide is for Australian taxpayers, investors and businesses with US filing obligations. It does not explain Australian income tax deductions or replace advice on residency, treaty or nonresident filing questions.
We cover the standard-versus-itemized choice, the 2026 limits, the 2/37 rule with a worked example, and a planning and documentation checklist. US dollar amounts appear as published by the IRS.
Key Takeaways
- No universal cap on the number of itemized deductions exists, but each category has its own cap, floor or phase-out.
- 2026 affects SALT, charitable gifts, mortgage insurance, casualty losses, gambling losses and educator expenses.
- Top-bracket taxpayers face the 2/37 reduction in the tax value of their deductions.
- Compare allowable itemized deductions with your standard deduction, and check residency and cross-border income first.
What Are Itemized Deductions and Who Can Claim Them?
Itemized deductions are eligible expenses listed on Schedule A. They reduce taxable income; they are not a dollar-for-dollar credit. According to the 2025 Schedule A instructions, Schedule A covers:
- Medical expenses
- State and local taxes
- Qualifying home mortgage interest
- Charitable gifts
- Certain casualty losses
Standard deduction versus itemizing
You generally use one method per return: the standard deduction or Schedule A, not both. The better option can flip from year to year as your expenses change.
The 2026 basic standard deduction amounts, per IRS Rev. Proc. 2025-32:
| Filing status | 2026 standard deduction |
|---|---|
| Single | $16,100 |
| Married filing separately | $16,100 |
| Married filing jointly | $32,200 |
| Head of household | $24,150 |
Taxpayers aged 65 or older, or blind, add $1,650 per condition ($2,050 if unmarried and not a surviving spouse).
Who cannot use the standard deduction
- Married filing separately taxpayers whose spouse itemizes
- Most nonresident aliens, with a narrow exception for certain students and business apprentices from India
Most Australians filing as nonresident aliens fall into the second group, so the standard deduction is usually off the table. Confirm against the current IRS rules.
Above the line, below the line, and non-itemizer deductions
Schedule 1 adjustments come before adjusted gross income (AGI), so they are "above the line." The standard deduction and Schedule A come after AGI. These are shorthand terms, not official form labels.
Some 2026 deductions are available without itemizing:
- Qualified tips, overtime and the senior deduction (Schedule 1-A)
- A charitable deduction of up to $1,000 ($2,000 joint) for cash gifts
Taxpayers with foreign income, foreign residence, treaty positions or US business interests should have a specialist confirm which rules apply to their return.
What Changed for Itemized Deductions in 2026?
The One Big Beautiful Bill Act (Pub. L. 119-21) changes or makes permanent several rules for tax years beginning after December 31, 2025.
The new overall limitation
Section 70111 of the Act reinstates a section 68 limit. It applies once taxable income reaches the 37% bracket.
It reduces itemized deductions by 2/37 of the lesser of your deductions or your income above the 37% threshold. The effect: deductions that would offset income taxed at 37% save tax at an effective 35%.
It differs from the old Pease limitation, which cut deductions by 3% of AGI above a threshold, up to an 80% ceiling. The new rule uses the 37% bracket and a lesser-of formula.
Other 2026 changes
- Charitable floor: itemizers deduct only gifts above 0.5% of AGI. Non-itemizers may claim up to $1,000 ($2,000 joint) for cash gifts to eligible charities; donor-advised funds are excluded.
- Mortgage insurance premiums: the itemized deduction returns for premiums paid in 2026 (per the IRS draft Pub. 936).
- Casualty losses: losses from state-declared disasters now qualify, alongside federally declared ones.
- Gambling losses: deductions are capped at the lesser of 90% of losses or winnings.
- Miscellaneous itemized deductions: the disallowance is now permanent, with an exception for educator expenses (up to $350 for 2026).
What to verify before filing
Several IRS 2026 forms and publications are still drafts. Before relying on a figure, confirm:
- Tax-year applicability and filing-status differences
- Inflation adjustments and phase-outs
- Carryforwards and any later IRS guidance
Which Itemized Deductions Have Specific Limits in 2026?
State and local taxes (SALT)
| Tax year | Cap (general / MFS) | Phase-down starts at MAGI | Minimum cap |
|---|---|---|---|
| 2026 | $40,400 / $20,200 | $505,000 / $252,500 | $10,000 / $5,000 |
The cap shrinks by 30% of MAGI above the threshold but never below the minimum. It rises 1% a year through 2029, then reverts to $10,000 ($5,000 MFS). You may deduct either state income tax or general sales tax, not both.
Mortgage interest and mortgage insurance
- Debt secured after 15 December 2017: $750,000 limit ($375,000 MFS)
- Debt secured between 14 October 1987 and 15 December 2017: $1,000,000 limit, under grandfathering rules
- Home-equity interest deductible only when proceeds buy, build or substantially improve the home
- Mortgage insurance deduction phases out from AGI of $100,000 and ends at $109,000 (half for MFS)
Charitable contributions
Itemizers face the 0.5% AGI floor, then percentage limits: generally 60% of AGI for cash gifts, and 50%, 30% or 20% depending on gift type and recipient. Excess amounts carry forward five years (15 for qualified conservation gifts).
Substantiation matters:
- Cash gifts need a bank record or written acknowledgement
- Gifts of $250 or more need a contemporaneous written acknowledgement
- Noncash gifts above $500 need Form 8283
Qualified charitable distributions from an IRA (owner aged 70½ or older) are capped at $111,000 for 2026, and the excluded amount earns no deduction.
Medical, casualty and gambling
- Medical and dental: only unreimbursed amounts above 7.5% of AGI
- Casualty: federally declared disaster losses face a $100 per-casualty and 10%-of-AGI reduction; qualified disaster losses use a $500 reduction without the 10% test
- State-declared disasters: qualify from 2026
- Gambling: 90% limit, offset against winnings, and only if you itemize
Miscellaneous deductions
Most 2% miscellaneous deductions stay unavailable. Educator expenses are the notable exception. Check the current Schedule A instructions.
How Does the 2/37th Rule Limit Itemized Deductions?
Let D be your itemized deductions after all other limits. Reduce D by 2/37 of the lesser of:
- D, or
- Taxable income (computed without this limit, plus D) above the start of your 37% bracket.
Calculation sequence
- Total eligible deductions.
- Apply category floors, caps, phase-outs and percentage limits.
- Apply the 2/37 reduction last.
2026 thresholds
| Filing status | 37% bracket starts at |
|---|---|
| Single / head of household | $640,600 |
| Married filing jointly | $768,700 |
| Married filing separately | $384,350 |
Worked example (illustrative only)
Take a married couple filing jointly with rounded figures, not personal advice:
- Deductions after other limits: $40,000
- Income above the $768,700 threshold: $80,000
- Lesser amount: $40,000
- Reduction: 2/37 × $40,000 = about $2,162
- Final allowable deductions: about $37,838
Thomson Reuters Tax Pro publishes a similar example: $41,750 of deductions and $81,300 above the threshold produce a $2,257 reduction, leaving $39,493.
The rule limits the tax value of deductions. The expenses remain claimable, and you can still use every category.
Who falls outside the rule
Taxpayers whose taxable income stays below their filing-status threshold are unaffected. Check the thresholds for your status.
Foreign income, entity-level taxes, pass-through income, capital gains, retirement contributions and treaty positions all affect taxable income. Model them together, not one at a time.
How Should Taxpayers Plan for and Document 2026 Itemized Deductions?
A decision process
- Identify your filing status and residency, which determine which limits apply.
- Estimate AGI and taxable income so percentage-based caps are realistic.
- List eligible expenses by deduction category.
- Apply each category's limit to those amounts.
- Compare the total with the standard deduction (if you are eligible for it) and model both outcomes.
Timing strategies
- Bunch charitable gifts or medical expenses into alternating years
- Review deductible payments before year-end
- Use qualified charitable distributions when eligible
- Manage income that could push you into the 37% bracket
Run the numbers on each strategy before you commit. Foreign taxes can be claimed as either a credit (generally Form 1116) or an itemized deduction, and you can switch by year.
Records to keep
- Tax statements and property-tax records
- Mortgage documents
- Medical receipts
- Charitable acknowledgements, Form 8283 and appraisals
- Disaster-loss evidence: ownership, date, cause, value loss, insurance claims
- A gambling diary with tickets and statements
- Documents supporting foreign income and tax paid
Where VJM Global fits
VJM Global supports Australian businesses and cross-border taxpayers with US tax compliance, accounting and advisory review, including Form 1040 and 1040-NR preparation, where US filing obligations apply.
Disclaimer
This article is general information. Tax law, IRS guidance, treaty rules (including Article 22 of the US-Australia treaty), residency and filing status can change the result. Get professional advice before accelerating expenses, changing charitable giving or choosing a deduction method.
Frequently Asked Questions
Is there a maximum on itemized deductions?
There is generally no cap on the number of itemized deductions. Individual categories carry caps, floors and phase-outs, and the 2026 high-income rule can reduce the overall benefit.
Who will get the standard deduction in income tax?
Most US filers qualify based on filing status. Exceptions include married-filing-separately taxpayers whose spouse itemizes, and most nonresident aliens. Confirm against current IRS rules.
What is the difference between above the line and below the line deductions?
Above-the-line adjustments reduce AGI. Below-the-line deductions, such as itemized deductions or the standard deduction, come after AGI is calculated. Some standard-deduction filers also get Schedule 1-A deductions.
What is the 2/37th rule on itemized deductions?
For taxpayers reaching the 37% bracket, it reduces allowable itemized deductions by 2/37 of the lesser of deductions or income above the threshold. See the calculation sequence above.
How do I know whether to itemize or take the standard deduction in 2026?
Total your allowable itemized deductions after every limit, compare with your standard deduction, and model both against your full US tax position.
Which itemized deductions are limited in 2026?
SALT, mortgage interest and insurance, charitable gifts, medical expenses, casualty losses and gambling losses all have limits, as does the overall high-income rule. Verify current thresholds before filing.
