New Advanced Planning Alert: New 2/37th Limitation on Itemized Deductions

We wanted to make you aware of another new provision in the 2025 federal tax law that may impact high-income individuals who itemize deductions—especially those making charitable contributions. As you may know, starting in 2026, a floor was added to charitable deductions meaning if you itemize, you will no longer get a deduction on the first 0.5% of your AGI for charitable contributions. 

Additionally, starting in 2026, a new rule known as the “2/37th limitation” will reduce the value of itemized deductions for individuals whose income exceeds the top federal tax bracket threshold ($640,600 for single filers and $768,700 for joint filers). Specifically, 2/37ths of your itemized deductions may be disallowed when calculating taxable income.

This change could affect deductions applied to income taxed at lower rates, such as long-term capital gains. For example, if you plan to make a large charitable donation following a major asset sale, the deduction may be reduced, potentially increasing your tax liability by approximately 1% of the deduction amount.

Importantly, this rule does not apply in 2025 so… if you are considering continuing to make charitable gifts, it may be beneficial to act before the end of the year.

As always, we recommend discussing these changes with your tax advisor to determine how they may affect your personal situation.