Itemized Deductions in 2025 and Beyond: What Retirees Need to Know About Recent Tax Law Changes

Introduction

If you’re approaching retirement or already retired, your tax picture has probably shifted more than once over the past decade. When the Tax Cuts and Jobs Act nearly doubled the standard deduction in 2018 and capped state and local tax (SALT) deductions at $10,000, millions of taxpayers — including many retirees — stopped itemizing altogether.

That was a relatively simple adjustment. But now the rules have changed again, and this time the changes are more layered.

The “One Big Beautiful Bill,” signed into law last July, made three substantial modifications to itemized deductions. Some take effect on your 2025 tax return; others begin in 2026. If you’re among the roughly 10% of filers who still itemize — or if you’re on the fence — these changes could meaningfully affect your retirement tax planning.

The core question is this: Should I still be itemizing, and how do these new rules fit into my broader tax strategy in retirement?

This article walks you through the three key changes — the increased SALT cap with income phase-outs, the new charitable contribution floor, and the itemized deduction reduction for high earners. You’ll learn what each change means in practical terms, how to weigh the trade-offs, and when it’s worth working with a tax-aware financial advisor to get the approach right.

---

Why Itemizing Became Less Common — And Why It Still Matters for Some Retirees

The Tax Cuts and Jobs Act Changed the Calculus

Before 2018, nearly 30% of taxpayers itemized their deductions. The Tax Cuts and Jobs Act (TCJA) changed that dramatically by:

• Nearly doubling the standard deduction (for 2025, it’s $15,750 for single filers and $31,500 for married couples filing jointly under the extended provisions)
• Capping the deduction for state and local taxes at $10,000
• Eliminating or restricting several other itemized deductions

The result? By 2019, only about 10% of taxpayers were itemizing. For retirees who had paid off their mortgages and lived in states with moderate taxes, the standard deduction simply became the better option.

When Itemizing Still Makes Sense in Retirement

In our work with retirees, we still see meaningful tax savings from itemizing for those who:

• Live in high-tax states such as Maryland, California, New York, or New Jersey
• Make substantial charitable contributions — especially those with a strong giving tradition
• Carry significant mortgage interest, perhaps on a second home or a late-in-life refinance
• Incur large medical expenses that exceed 7.5% of their adjusted gross income [IRS Publication 502 — Medical and Dental Expenses]
• Have high-income years due to Roth conversions, capital gains, or large retirement account distributions

The recent law changes make this decision more nuanced. Some retirees who had given up on itemizing may find it worthwhile again, while others who have been itemizing may see their benefits reduced.

---

Change #1 — The SALT Cap Increases to $40,000 (With Important Income Limits)

Understanding the New $40,000 SALT Cap for 2025–2029

The most immediately impactful change for many retirees is the increase in the state and local tax (SALT) deduction cap. For tax years 2025 through 2029, the cap rises from $10,000 to $40,000 for most filers ($20,000 for married filing separately).

This applies to your 2025 tax return — the one you’re filing now — so it affects your tax planning immediately.

What counts as SALT?

• State and local income taxes (or sales taxes, if you elect that option)
• Real property taxes on your primary residence and any other real estate you own
• Personal property taxes (such as vehicle registration fees based on value)

For retirees in high-tax states, this can translate to real savings. Consider a couple in Maryland with $180,000 in retirement income, paying $18,000 in state income taxes and $12,000 in property taxes. Previously, they could only deduct $10,000 of their $30,000 in SALT. Now they can deduct the full $30,000 — saving them potentially $4,000–$5,000 in federal taxes, depending on their bracket.

The Income Phase-Out That Most People Miss

Here’s where it gets more complex, and where we see even experienced tax preparers caught off guard: the $40,000 cap phases out for higher-income filers.

For 2025, if your modified adjusted gross income (MAGI) exceeds $500,000 ($250,000 for married filing separately), your SALT deduction begins to phase down — but not below the old $10,000 floor. The mechanics:

The $40,000 cap is reduced by 30% of the amount your MAGI exceeds $500,000.

Example: A married couple with $580,000 in MAGI and $35,000 in state and local taxes:

• MAGI exceeds the $500,000 threshold by $80,000
• 30% × $80,000 = $24,000 reduction
• SALT cap drops from $40,000 to $16,000 ($40,000 – $24,000)
• They deduct $16,000, even though they paid $35,000 in SALT

Once MAGI reaches $600,000 or higher, the cap reverts to $10,000 regardless of actual SALT paid.

Modified AGI for this purpose includes your regular AGI plus foreign earned income exclusions, foreign housing exclusions, and certain income from U.S. territories. For most retirees, modified AGI equals regular AGI — but if you have foreign or territorial income, pay attention.

Strategic Considerations for Retirees

The phase-out creates both planning opportunities and pitfalls:

• Roth conversion timing: If you’re planning large Roth conversions that push your income over $500,000, reconsider the timing or size. You’ll lose some or all of the enhanced SALT benefit. [[link to RCS blog on Roth conversion strategies]]
• Income bunching: If your income fluctuates — due to capital gains, business income, or large IRA distributions — consider bunching SALT payments in lower-income years when you get the full $40,000 benefit.
• The 2029 cliff: These enhanced caps expire after 2029 unless Congress acts. If you’re in your 60s now, you have about five years to take advantage of this window. Long-term retirement tax planning should account for the potential return to the $10,000 cap.
• State tax interactions: Some states offer deductions or credits that interact with federal SALT planning. For example, some states allow deductions for contributions to state 529 plans or state-sponsored charitable funds.

The thresholds increase by 1% annually through 2029. For 2026 returns (filed in 2027), the cap will be $40,400 and the phase-out begins at $505,000 MAGI.

---

Change #2 — New Charitable Contribution Rules Affect Both Itemizers and Non-Itemizers

The 0.5% AGI Floor for Itemized Charitable Deductions (Starting 2026)

Beginning with your 2026 tax return (filed in 2027), charitable contributions are only deductible to the extent they exceed 0.5% of your adjusted gross income.

This mirrors the structure already in place for medical expenses (which require exceeding 7.5% of AGI), though the threshold is much lower.

Example: A retired couple with $200,000 in AGI donates $8,000 to their church and favorite charities in 2026:

• 0.5% of $200,000 = $1,000 (the floor)
• Charitable deduction = $8,000 – $1,000 = $7,000
• The $1,000 below the floor is not deductible that year

Good news: Any amount that’s suspended can be carried forward for up to five years. So if you give $2,000 in 2026 and your floor is $1,000, you lose the deduction for that year but can carry forward the full $2,000 to use in 2027 if your giving that year exceeds your floor.

Why This Matters More Than It Might Seem

For many retirees who are regular, modest charitable givers, this floor creates a quiet but real cost. Consider a widow with $85,000 in annual retirement income who gives $3,000 per year:

• Her 0.5% floor = $425
• Her deductible charitable contribution = $2,575
• She’s lost $425 in deductions — roughly $100 or more in additional tax, depending on her bracket

Over a decade, that adds up. And the bigger concern is behavioral: many retirees give partly because of the tax benefit. This change, while small in percentage terms, may discourage consistent charitable giving among middle-income retirees who are on the margin of itemizing.

The Silver Lining — Above-the-Line Deduction for Non-Itemizers

Congress tried to balance the scales: beginning with 2026 returns, non-itemizers can deduct up to $1,000 in charitable cash contributions ($2,000 for joint filers) without itemizing.

This is an “above-the-line” deduction — it reduces your adjusted gross income directly. No Schedule A required.

This benefits retirees who take the standard deduction but still give to charity, want a tax benefit without the complexity of itemizing, or have modest giving that would fall below the 0.5% floor anyway.

Important restrictions:

• Only cash contributions qualify (not donated goods or securities)
• Must be to qualified charitable organizations (not private foundations or donor-advised funds)
• Subject to substantiation requirements (receipts, bank records, written acknowledgments)

Strategic Charitable Giving for Retirees

These changes create several planning considerations:

Qualified Charitable Distributions (QCDs) become even more attractive. If you’re 70½ or older, you can donate up to $111,000 per year (2026 limit, adjusted annually for inflation) directly from your IRA to charity. These distributions: [IRS guidance on QCDs]

• Count toward your required minimum distribution
• Are excluded from your taxable income entirely
• Aren’t subject to the 0.5% floor — because they never hit your AGI
• Work whether you itemize or not

In our experience, QCDs are now clearly the superior approach to charitable giving for most retirees with IRA assets. Yet we consistently see clients making December cash gifts without considering this option first.

Bunching charitable contributions can help too. Concentrate multiple years of giving into a single year to clear the 0.5% floor and maximize itemized deductions. In “off” years, take the standard deduction and use the non-itemizer cash deduction. [[link to RCS blog on charitable giving strategies in retirement]]

Donor-advised funds remain powerful for itemizers. While the non-itemizer cash deduction doesn’t apply to donor-advised fund contributions, itemizers can still bunch large contributions into a DAF in high-income years, claim the full itemized deduction (subject to AGI limits), and distribute to charities over multiple years.

Document everything. With the new floors and carry-forward provisions, meticulous record-keeping is essential. Track every contribution, retain receipts, and work with your tax preparer to optimize carryforwards.

---

---

Change #3 — High-Income Itemizers Face Additional Deduction Limitations

The 2/37 Reduction Rule for Wealthy Retirees

Starting with 2026 returns, high-income taxpayers face an additional limit on their total itemized deductions. This rule effectively reduces the tax benefit of itemizing for those in the top bracket.

The technical rule: Your total itemized deductions are reduced by 2/37 of the lesser of:

• Your total itemized deductions, or
• The amount by which your taxable income exceeds the threshold for the 37% federal tax bracket

For 2025, the 37% bracket begins at taxable income over $626,350 for married filing jointly ($313,175 for single filers). These amounts adjust annually for inflation.

What This Means in Plain English

Many tax professionals describe this as effectively capping the tax benefit of itemized deductions at 35% rather than 37% for those in the top bracket.

Example: A married couple with taxable income of $726,350 in 2026 and $50,000 in itemized deductions:

• Taxable income exceeds the 37% threshold ($626,350) by $100,000
• The lesser of itemized deductions ($50,000) or excess income ($100,000) is $50,000
• Deduction reduction = 2/37 × $50,000 = $2,703
• Allowed itemized deductions = $50,000 – $2,703 = $47,297

In effect, they lose about 5.4% of their itemized deductions.

Who This Affects

This provision primarily impacts:

• Successful business owners and executives in early retirement who continue to earn substantial income or have large retirement account distributions
• Retirees with significant investment income from taxable accounts, especially in years with large capital gains
• Those taking large IRA or 401(k) distributions that push them into the top bracket — whether voluntarily or due to required minimum distributions
• Inheritors of large retirement accounts who must take distributions under the 10-year rule

The impact is relatively modest compared to the other changes — most affected taxpayers will see itemized deductions reduced by 2%–6% — but it’s another factor that makes retirement tax planning more complex at higher income levels.

Planning Strategies for High-Income Retirees

• Multi-year tax bracket management: Model your tax brackets over multiple years with your advisor. Sometimes it’s better to take larger distributions in one year than to spread income evenly if it keeps you in the 37% bracket longer.
• Tax-free income sources: Municipal bond interest, Roth distributions, and other tax-free income don’t count toward the threshold — making them potentially more valuable for high-income retirees.
• Charitable planning becomes more valuable: QCDs reduce your AGI, which can help keep you below the 37% threshold entirely — preserving the full value of your other itemized deductions.
• Timing of deductions: If you control when certain deductible expenses are paid (property taxes, medical procedures), consider whether bunching them in years below the threshold would help.
• State tax considerations: Many high-tax states have their own itemized deduction limitations or phase-outs. Your state and federal rules may interact in complex ways, making comprehensive tax planning essential.

---

Should You Still Itemize? A Decision Framework for Retirees

Run the Numbers Every Year

The itemize-versus-standard-deduction decision isn’t set-it-and-forget-it. Your optimal approach may change from year to year based on income levels, the timing and size of charitable contributions, major medical expenses, SALT payments, and shifts in your life circumstances.

Annual tax planning checklist:

1. Estimate your AGI for the year (wages, retirement distributions, Social Security, investment income)
2. Calculate your standard deduction — including additional amounts for age 65+
3. List all potentially deductible expenses by category (SALT, mortgage interest, charitable, medical)
4. Apply the new rules (SALT cap and phase-out, charitable floor, high-income reduction)
5. Compare your net itemized deductions to your standard deduction
6. Consider timing moves — bunching deductions or deferring income if you’re near a threshold

The Age 65+ Bonus Makes the Standard Deduction a High Bar

Don’t overlook the extra standard deduction for taxpayers age 65 and older. For 2025:

• Single filers 65+ get an additional $1,950
• Married filing jointly with both spouses 65+ get an additional $1,550 per person ($3,100 total)

That gives a married couple both 65+ a 2025 standard deduction of roughly $34,600. That’s a high bar for itemized deductions to clear, especially with the new charitable floor and potential high-income reductions.

Common Mistakes Retirees Make With Itemizing

Through years of working with retirees on tax planning, we see certain patterns again and again:

Mistake #1: Assuming last year’s approach works this year. Tax situations change, laws change, and what worked at 62 may not work at 72 when RMDs begin.

Mistake #2: Not tracking charitable contributions carefully. With the new carry-forward provisions, failing to document contributions can cost thousands in lost deductions over multiple years.

Mistake #3: Ignoring state tax implications. Some states don’t conform to federal itemizing rules. You may need to itemize for federal but take the standard deduction for state — or vice versa.

Mistake #4: Making year-end gifts without considering QCDs. If you’re over 70½, a QCD is almost always better than a cash donation — but many retirees make December gifts without thinking through the optimal approach.

Mistake #5: Failing to coordinate with a financial advisor. Tax planning and retirement income planning are deeply interconnected. Decisions about Roth conversions, Social Security timing, and withdrawal sequencing all affect whether itemizing makes sense.

---

How Itemizing Fits Into Comprehensive Retirement Tax Planning

It’s Not Just About One Year’s Deductions

Sophisticated retirement tax planning isn’t about maximizing deductions in any single year — it’s about minimizing your lifetime tax burden while maintaining the retirement lifestyle you want.

Your itemizing strategy should coordinate with:

• Income sequencing: The order in which you draw from taxable, tax-deferred, and tax-free accounts affects your AGI — which drives SALT phase-outs, charitable floors, and high-income reductions.
• Roth conversion planning: Converting traditional IRA funds to Roth creates taxable income, but it can be strategic if done in years when you’re below key thresholds.
• Social Security timing: When you start benefits affects both your AGI and your marginal tax rate, which changes the value of itemized deductions.
• Medicare IRMAA planning: Your modified AGI from two years ago determines your Medicare Part B and Part D premiums. Managing AGI to stay below IRMAA thresholds might be more valuable than maximizing itemized deductions.
• Required minimum distributions: Once RMDs begin, you have less control over your income. Planning your itemizing strategy before RMDs start gives you more flexibility.

When Professional Guidance Makes the Most Sense

The recent changes add another layer of complexity to retirement tax planning. While many retirees can handle straightforward returns, consider working with a qualified professional if:

• Your income puts you near phase-out thresholds ($500,000+ MAGI or approaching the 37% bracket)
• You have multiple income sources (pensions, part-time work, rental income, business income, investments)
• You’re planning Roth conversions or large IRA distributions
• You own property in multiple states
• You have complex charitable giving (donor-advised funds, private foundations, appreciated securities)
• You’ve experienced a major life change (widowhood, divorce, inheritance, sale of a business)

Look for advisors who have specific expertise in retirement tax planning, use tax projection software to model multiple years and strategies, coordinate investment management with tax planning, and work on a fiduciary basis — putting your interests first.

---

Practical Action Steps You Can Take Now

For Your 2025 Tax Return

Step 1: Gather your 2024 tax return. Review whether you itemized or took the standard deduction. Calculate your total SALT paid.

Step 2: Estimate your 2025 AGI. Determine whether you’re near the $500,000 SALT phase-out threshold or the 37% bracket threshold.

Step 3: Total your potential 2025 itemized deductions — SALT (up to $40,000, subject to phase-out), mortgage interest, charitable contributions, and medical expenses exceeding 7.5% of AGI.

Step 4: Compare to your 2025 standard deduction ($15,750 single, $31,500 MFJ, plus age 65+ additions).

Step 5: Make strategic year-end moves if needed. If you’re close to itemizing, consider bunching charitable giving or prepaying property taxes. If you’re over 70½ and haven’t made charitable gifts yet, consider QCDs from your IRA.

For 2026 and Beyond

Step 6: Review your charitable giving strategy in light of the 0.5% AGI floor taking effect in 2026. If you give modest amounts annually, consider bunching contributions in alternating years, using QCDs, or leveraging the non-itemizer cash deduction in off years.

Step 7: Model your income over the next 3–5 years. Factor in how the enhanced SALT cap (through 2029) interacts with Roth conversion plans, RMDs starting at age 73 or 75, and any state tax planning considerations.

Step 8: Create a systematic record-keeping system for charitable contributions and other itemized deductions. With new carry-forward provisions and more complex rules, documentation is critical.

---

Key Takeaways

• The SALT deduction cap increased to $40,000 for 2025–2029, but phases out for modified AGI over $500,000, reverting to $10,000 at $600,000+ of income.
• Charitable deductions for itemizers face a new 0.5% AGI floor starting in 2026, but suspended amounts can be carried forward for five years.
• Non-itemizers gain a new above-the-line deduction of up to $1,000 ($2,000 joint) for cash charitable contributions beginning with 2026 returns.
• High-income itemizers in the 37% bracket face an additional deduction reduction starting in 2026, effectively limiting the tax benefit to about 35%.
• Qualified Charitable Distributions from IRAs become even more valuable as they avoid AGI entirely and aren’t subject to the new charitable floor.
• The itemize-versus-standard-deduction decision should be reevaluated annually as income, life circumstances, and tax laws change.
• Comprehensive retirement tax planning coordinates itemizing strategy with Roth conversions, Social Security timing, RMD planning, and income sequencing for optimal lifetime efficiency.

---

Is Your Retirement Tax Strategy Optimized for These New Rules?

The changes to itemized deductions are just one piece of the retirement tax puzzle. If you’re wondering whether itemizing still makes sense, how to structure charitable giving more tax-efficiently, or how these rules interact with your broader retirement income strategy — now is a good time to get clarity.

Schedule a complimentary introductory call to discuss your specific tax situation, strategic opportunities to minimize taxes throughout retirement, and how to coordinate deductions with Roth conversions, Social Security timing, and income planning.

Schedule Your Introductory Call →

Not ready to talk yet? Start with our free retirement checklists — covering tax strategies, planning fundamentals, and key financial deadlines — so you can take stock of where you stand today.

Download Your Free Retirement Checklists →