The Fine Print: Income Limitations for Common Deductions

Tax News You Can Use | For Professional Advisors

Jane Ditelberg, Director of Tax Planning

August 11, 2025

The Fine Print: Income Limitations for Common Deductions

During the discussions surrounding the One Big Beautiful Bill Act (OBBBA), there was a great deal of publicity about new deductions for everything from overtime pay to interest on a loan for a new car to the new deduction for taxpayers over age 65. Far less publicized were the details on exactly who would be entitled to those deductions and how much benefit would be available. When we investigate the details, we see that the tax benefit of these provisions is in many cases capped or phased out depending on the taxpayer’s income. Certain other tax advantages are similarly phased out, such as the child tax credit or avoiding the application of the alternative minimum tax (AMT). Finally, taxpayers in the highest tax bracket have a portion of the benefit from all itemized deductions eliminated under the OBBBA.

What Are The Limitations?

The following table shows the income levels where the deduction or other tax benefit is fully available, partially available or fully phased out for single taxpayers and for married taxpayers filing a joint return.

Congress did not choose the same income level for phasing out each of the deductions, so it is important to check the ranges for each separate provision. For example, a single taxpayer with $110,000 in Adjusted Gross Income (AGI) would be entitled to a partial deduction for interest on a new car loan and a full deduction for overtime pay and for tip income. A married couple filing jointly with income of $500,000 would be entitled to all of the increased cap on deductions for state and local taxes (SALT) and would not be subject to the AMT, but they would not be eligible for the child tax credit, the new senior deduction, or deduction for interest on a car loan, and would be entitled to a partial benefit from a deduction for pass-through business income and the deductions for overtime pay or tips. This makes planning even more challenging.

How Do The Deduction Limitations Impact Taxes Owed?

Ed can deduct all $40,000 of his state and local taxes, and the only limit on his charitable deduction is the 0.5% floor applicable to all taxpayers. Ted has higher income, so his SALT cap is lowered to $10,000 (so the additional $30,000 in SALT provides no federal tax benefit), and his charitable gift is subject to the floor, which is higher because it is based on his higher income. Finally, Ted has another 0.54% of all itemized deductions eliminated because he is in the highest marginal tax bracket of 37%.

Bracket Management

How can a taxpayer navigate these rules? The key is bracket management. By this we mean accelerating or deferring income or deductions so that the maximum benefit is available in each tax year. For example, the increased SALT deductions from the higher cap and the senior citizen, tip and overtime deductions are available for a fixed number of tax years (2025 through 2028). The floor for the charitable deduction and the cap on all itemized deductions for those in the 37% bracket do not kick in until 2026. Some steps a taxpayer might consider to keep income levels low enough to qualify for the available deductions in that period might be:

• Making large charitable contributions in 2025 when neither the cap nor the ceiling applies.
• Deferring compensation until 2029 or later.
• Using the installment method for significant sales to spread income recognition over multiple tax years.
• Using qualified charitable distributions (QCDs) from taxable retirement accounts to avoid having those amounts included in adjusted gross income (AGI).
• Deferring large income receipts until 2029 or later. These could include Roth conversions, sales of significant assets, deferred compensation or bonuses.
• Shifting investments to those that generate tax-exempt income or to non-dividend paying stocks so that taxable income can be recognized after 2028.
• Using tax-loss harvesting to offset recognized gains. This may also involve tax-gain harvesting in years when additional income will not push the taxpayer over the income limit.
• Bunching income and deductions in alternating years if it is not possible to stay under the income threshold every year.