Introduction
Rule changes for tax year 2026 could tip whether itemising still beats the standard deduction. That matters most if you face large state and local taxes, mortgage interest, charitable gifts or medical bills.
This guide covers U.S. federal rules for Australian-based readers with U.S. filing obligations or U.S.-connected income. It does not cover Australian individual tax deductions.
Only about 10% of U.S. taxpayers itemised in 2022, according to the Tax Policy Center. The 2026 return is filed in 2027, so you have time to plan.
We'll cover how to identify qualifying expenses, apply the new limits, compare the result with your standard deduction and keep the right records.
Key Takeaways
- You generally pick the standard deduction or Schedule A itemised deductions, not both.
- 2026 brings a SALT cap phase-down, a 0.5% charitable floor, a high-income limit and new wagering-loss rules.
- Filing status, age, income and spending mix decide the better option, not total spending alone.
- Australian taxes and receipts are not automatically U.S. deductions.
What "itemized deductions" mean for Australian-based taxpayers
Standard, itemised and above-the-line deductions
Three categories matter on a U.S. return:
- Standard deduction: a fixed amount that reduces taxable income
- Itemised deductions: eligible expenses totalled on Schedule A
- Above-the-line deductions: Schedule 1 adjustments subtracted earlier to reach adjusted gross income (AGI)
The standard or itemised deduction then applies after AGI.
Schedule A is a U.S. form with its own categories. It is not interchangeable with an Australian tax return, so don't map one onto the other.
Timing
"Tax year 2026" means income earned in calendar 2026, reported on a return filed in 2027. The Form 1040 is due 15 April 2027. U.S. citizens and resident aliens living abroad generally get an automatic extension to 15 June, though interest still runs on unpaid tax from April. Check current IRS guidance for forms before filing.
Cross-border issues
If you live in Australia, several cross-border points affect how deductions work:
- Residency and source of income
- Foreign taxes, including whether to claim a credit or a deduction
- Currency conversion (the IRS accepts a posted rate used consistently)
- Treaty issues
- Whether an expense connects to U.S. taxable income
Nonresident aliens filing Form 1040-NR generally cannot claim the standard deduction, apart from a narrow treaty exception.
The key itemized-deduction changes and tax breaks for 2026
Most changes come from Public Law 119-21, enacted 4 July 2025.
The new limit for top-bracket taxpayers
From 2026, otherwise allowable itemised deductions are reduced by 2/37 of the lesser of two figures: your deductions, or the amount by which taxable income (before the limit) plus itemised deductions exceeds the top-bracket threshold. In effect, the benefit is capped at 35% rather than 37%.
2026 thresholds:
- $640,600: single and head of household
- $768,700: married filing jointly and qualifying surviving spouse
- $384,350: married filing separately
Hypothetical example, for illustration only: a single filer has $100,000 of itemised deductions and the excess over the threshold is $150,000. The lesser figure is $100,000, so the reduction is $100,000 × 2/37 ≈ $5,405. Allowable deductions fall to about $94,595. At 37%, the tax saving is roughly $35,000 rather than the $37,000 you'd expect.
State and local tax (SALT) deduction
The 2026 SALT ceiling is $40,400. It phases down by 30% of the amount your modified AGI exceeds $505,000, but never below $10,000. For married filing separately, halve everything: $20,200, $252,500 and $5,000.
The cap rises 1% a year from 2027 to 2029, then reverts to $10,000 ($5,000 MFS) after 2029.
Capped taxes include state and local income or general sales taxes (you choose one), plus real and personal property taxes. Australian federal, state or council taxes are not automatically U.S. SALT. Foreign real property taxes are excluded from the individual SALT deduction, and foreign income taxes sit outside the cap and are treated separately.
Charitable contributions
Itemisers face a new floor: the deduction is reduced by 0.5% of the contribution base, generally AGI. Amounts disallowed only because of the floor carry forward five years, and remain subject to the floor later.
Existing percentage ceilings still apply. Cash to qualifying public charities can reach 60% of AGI, other gifts face 50%, 30% or 20% limits, and excess generally carries forward five years.
Non-itemisers get a separate deduction of up to $1,000 ($2,000 joint) for cash gifts to eligible organisations. Donor-advised fund gifts generally don't qualify.
Only qualified organisations count. IRS guidance treats foreign charities as generally ineligible, with treaty exceptions for certain Canadian, Mexican and Israeli charities. Confirm current IRS guidance before treating gifts to Australian charities as deductible.
Standard deduction and senior changes
| Filing status | 2026 standard deduction |
|---|---|
| Single / married filing separately | $16,100 |
| Married filing jointly / surviving spouse | $32,200 |
| Head of household | $24,150 |
The additional amount for age 65+ or blindness is $1,650 per status for married filers and $2,050 for unmarried filers.
Separate from that, an enhanced senior deduction of $6,000 per eligible person aged 65+ applies for 2025 to 2028. It phases down above MAGI of $75,000 (single) or $150,000 (joint). You can claim it whether you itemise or not, and it is not a Schedule A item.
Other notable changes
- Mortgage insurance premiums: a draft 2026 Publication 936 treats qualified premiums as deductible mortgage interest, phasing out above $100,000 AGI ($50,000 MFS). It's a draft, so confirm the final version.
- Educator expenses: an above-the-line deduction, limited to $350 for 2026.
- Casualty losses: covers federally declared disasters and qualifying state-declared areas. Not every state declaration qualifies.
- Wagering losses: limited to 90% of losses and cannot exceed wagering gains.
Tax breaks that are not itemised deductions
These sit on Schedule 1-A for 2025 to 2028, are available to itemisers and non-itemisers, and do not go on Schedule A:
- Qualified tips: up to $25,000, phasing out above MAGI of $150,000 single ($300,000 joint)
- Qualified overtime: up to $12,500 ($25,000 joint), same phaseout
- New personal-vehicle loan interest: up to $10,000, phasing out above $100,000 ($200,000 joint)
Statutory eligibility conditions apply. Figures reflect guidance at publication; update if IRS forms, instructions or law change.
How to calculate itemized deductions and compare them with the standard deduction
How to calculate itemised deductions and compare them with the standard deduction
Build the total
Gather expenses by Schedule A category:
- Medical and dental
- Taxes paid (SALT)
- Interest paid (mortgage)
- Charitable gifts
- Casualty and theft losses, where allowed
- Wagering losses and other permitted items
Test each category on its own for thresholds, caps, reimbursements and substantiation. If the final 2026 Schedule A is not yet released, use the 2025 instructions for layout while the 2026 statute governs changed limits.
Apply the 2026 limits
- Remove non-qualifying expenses.
- Keep only unreimbursed medical costs above 7.5% of AGI.
- Apply the SALT cap and any phase-down.
- Apply the 0.5% charitable floor and percentage ceilings.
- Cap wagering losses at 90% and at your gains. They cannot offset unrelated income.
- Apply the high-income limit last.
Compare with the standard deduction
Illustrative example, with assumptions: a single filer, under 65, has $14,000 SALT (capped at $40,400, so fully allowed), $9,000 mortgage interest and $4,000 of charitable gifts after the floor. Total: $27,000. The standard deduction is $16,100, so itemising wins by $10,900.
You generally take the larger benefit, not both. Eligible above-the-line deductions stay available either way.
Consider the tax effect
A deduction reduces taxable income, not tax dollar for dollar. At a 24% marginal rate, $10,900 of extra deduction saves about $2,616. For top-bracket taxpayers, the new limit can shrink the benefit even when the gross total looks far above the standard deduction.
Check the return
Itemised deductions are reported on Schedule A, attached to Form 1040. To see whether you itemised last year, check the prior-year return or your tax software summary.
Which expenses qualify, and which common expenses do not
State and local taxes
U.S. state and local income or sales taxes, real property taxes and personal property taxes qualify, up to the cap. Don't assume Australian income tax, council rates or GST fit this category. Cross-border cases need professional review.
Medical and dental expenses
Only unreimbursed costs above 7.5% of adjusted gross income (AGI) count. Amounts paid from a Health Savings Account (HSA) or reimbursed by a Flexible Spending Account (FSA) can't be claimed again, and HSA contributions aren't medical expenses. Keep invoices, insurer statements, reimbursement records and proof of payment.
Mortgage interest and home costs
Qualified mortgage interest, points and (if finalised) mortgage insurance premiums can qualify. The acquisition-debt limit remains $750,000 ($375,000 if married filing separately).
Home-equity interest isn't deductible unless proceeds buy, build or substantially improve the home. Principal repayments, improvements (which add to basis), ordinary repairs and household costs don't qualify.
Charitable gifts and disaster losses
Keep a bank record or written communication for cash gifts. A single gift of $250 or more needs a contemporaneous written acknowledgement. Noncash gifts need extra substantiation.
Casualty losses depend on a qualifying disaster declaration, so verify the rules for your event.
Common expenses that are not allowed
- Personal, living and family expenses
- U.S. federal income tax
- Ordinary unreimbursed employee expenses
- Home improvements
- Unsupported cash payments
- Costs reimbursed by an employer or insurer
A large cost, or one tied to work, isn't automatically a Schedule A deduction.
2026 tax-planning and documentation checklist
Plan before year-end
Model the timing of charitable gifts, medical payments and SALT payments where you control it. Prepaying isn't automatically beneficial. "Bunching" several years of gifts into one year can tip you over the standard deduction in that year. You can then take the standard deduction the following year.
Higher-income taxpayers should discuss income timing, retirement contributions, capital-loss planning and bunching with a qualified adviser. None of these is a universal recommendation.
Gather and organise records
- Prior-year Form 1040 and Schedule A
- Mortgage interest statements and property-tax records
- Medical receipts and insurance statements
- Donation acknowledgements
- Disaster-loss and wagering records
- Proof of payment
- Foreign income statements, foreign tax documents and your exchange-rate method
- Evidence of whether an expense relates to U.S. taxable activity
When professional review may help
Seek review if any of these apply:
- U.S. filing obligations while based in Australia
- Income or assets across multiple jurisdictions
- High income, foreign assets or business interests
- Uncertain currency conversion or expense allocation
VJM Global provides tax-compliance and accounting support, including U.S. Form 1040 and 1040-NR preparation, and has served 250+ Australian businesses. If you need help organising cross-border records and understanding U.S.-connected compliance, the team can review your situation. Outcomes depend on your individual circumstances and can't be promised in advance.
Frequently Asked Questions
Should I itemize deductions or take the standard deduction in 2026?
Compare your allowable Schedule A total, after all limits and any age-related amounts, with the standard deduction for your filing status. Choose the larger benefit.
What itemized deductions can I claim for 2026?
Main categories are medical and dental, state and local taxes, mortgage interest, charitable gifts, qualifying casualty losses and wagering losses. Each has its own thresholds, caps and substantiation rules.
How do I calculate my itemized deductions for 2026?
Gather expenses, apply each category's limits, add the allowable amounts, then compare the total with your standard deduction.
What is the standard deduction for 2026 (including additional amounts for seniors)?
It is US$16,100 for single or married filing separately, US$32,200 joint and US$24,150 head of household. Age 65+ or blind adds US$1,650 (married) or US$2,050 (unmarried). The separate US$6,000 senior deduction is distinct.
Is there a maximum amount of itemized deductions I can claim in 2026?
There is no single overall cap. Individual categories have limits (such as SALT), and the new 2/37 rule can reduce the total for top-bracket taxpayers.
Which common expenses are not allowed as itemized deductions?
You generally cannot claim personal expenses, federal income tax, reimbursed costs, unsupported payments or home improvements. Australian expenses need separate cross-border analysis for US Schedule A.
