Here’s what HIVE AI had to say about “How does the new law affect itemized deductions, especially for medical expenses and mortgage interest under the One Big Beautiful Bill?”:
Itemized Deductions Under the One Big Beautiful Bill: Medical Expenses and Mortgage Interest
The One Big Beautiful Bill introduces significant changes to the itemized deduction framework that will fundamentally alter how taxpayers calculate their tax liability. These modifications include a new limitation mechanism for itemized deductions and specific enhancements to mortgage interest deduction provisions, while maintaining existing medical expense deduction structures.
New Itemized Deduction Limitation Framework
The One Big Beautiful Bill establishes a comprehensive limitation on itemized deductions through a new Section 68 that reduces itemized deductions by 2/37 of the lesser of the total itemized deductions or the amount by which taxable income exceeds the 37 percent tax bracket threshold One Big Beautiful Bill Act: Sec. 70111. Limitation on tax benefit of itemized deductions . This represents a fundamental restructuring of how itemized deductions are limited for higher-income taxpayers.
The new limitation operates as a percentage reduction rather than the previous dollar-based threshold system. In the case of an individual, the amount of the itemized deductions otherwise allowable for the taxable year (determined without regard to this section) shall be reduced by 2/37 of the lesser of— (1) such amount of itemized deductions, or (2) so much of the taxable income of the taxpayer for the taxable year (determined without regard to this section and increased by such amount of itemized deductions) as exceeds the dollar amount at which the 37 percent rate bracket under section 1 begins with respect to the taxpayer One Big Beautiful Bill Act: Sec. 70111. Limitation on tax benefit of itemized deductions .
This limitation mechanism creates a graduated reduction that affects taxpayers whose income reaches the highest tax bracket. For head of household filers, the 37% tax bracket begins at income over $500,000 IRC § 1(j) , meaning the itemized deduction limitation would apply to taxpayers with taxable income exceeding this threshold. The 2/37 fraction represents approximately a 5.4% reduction in itemized deductions for affected taxpayers.
Coordination with Other Deduction Limitations
The new itemized deduction limitation is applied after the application of any other limitation on the allowance of any itemized deduction One Big Beautiful Bill Act: Sec. 70111. Limitation on tax benefit of itemized deductions . This sequencing ensures that specific limitations on individual deduction categories are calculated first, with the overall limitation applied to the resulting total.
The legislation includes specific provisions to prevent the itemized deduction limitation from affecting qualified business income calculations. Section 199A calculations for both regular taxpayers and patrons of specified agricultural and horticultural cooperatives are computed without regard to section 68 One Big Beautiful Bill Act: Sec. 70111. Limitation on tax benefit of itemized deductions , ensuring that the business income deduction is not reduced by the itemized deduction limitation.
Enhanced Mortgage Interest Deduction Provisions
The One Big Beautiful Bill makes significant improvements to the mortgage interest deduction by making permanent the current limitations and adding new benefits. The legislation removes the sunset date for the $750,000 principal limitation and makes mortgage insurance premiums permanently deductible as interest One Big Beautiful Bill Act: Sec. 70108. Extension and modification of limitation on deduction for qualified residence interest .
The Tax Foundation analysis confirms that the legislation makes the $750,000 principal limit for the home mortgage interest deduction permanent, which reduces households’ taxable incomes and, consequently, their total taxes paid Tax Foundation . This represents a continuation of the Tax Cuts and Jobs Act limitations but provides certainty by removing the expiration date.
The mortgage insurance premium provision represents a significant enhancement for many homeowners. Mortgage insurance premiums are now treated as interest under the qualified residence interest provisions One Big Beautiful Bill Act: Sec. 70108. Extension and modification of limitation on deduction for qualified residence interest , making these payments fully deductible for taxpayers who itemize deductions, subject to the overall mortgage interest limitations.
Medical Expense Deduction Framework Remains Unchanged
The One Big Beautiful Bill does not modify the fundamental structure of medical expense deductions, which continue to operate under existing law with the 7.5% of adjusted gross income threshold. Taxpayers can deduct medical and dental expenses on Schedule A, Itemized Deductions, to the extent the expenses exceed 7.5% of the AGI IRS IRM 21.6.4 Tax Computation / Accounting Period Changes .
The medical expense deduction continues to cover a broad range of qualifying expenses. Capital improvements for medical purposes are deductible to the extent they exceed any increase in property value, with the entire cost deductible if no value increase occurs Treasury Reg. Treasury Regulation 1.213-1 . Operation and maintenance expenses for medical capital assets are fully deductible if the medical reason for the original expenditure still exists Treasury Reg. Treasury Regulation 1.213-1 .
Transportation expenses for medical care remain deductible with specific limitations. Transportation primarily for and essential to medical care is deductible, but meals and lodging while away from home receiving medical treatment are not deductible Treasury Reg. Treasury Regulation 1.213-1 . In-patient hospital care costs, including meals and lodging, are fully deductible as medical expenses Treasury Reg. Treasury Regulation 1.213-1 .
Impact of New Limitation on Medical and Mortgage Interest Deductions
The new itemized deduction limitation will affect both medical expense and mortgage interest deductions for high-income taxpayers. Since the limitation applies to total itemized deductions, taxpayers with substantial medical expenses or mortgage interest payments may see these benefits reduced if their income exceeds the 37% tax bracket threshold.
For medical expenses, this creates a double limitation effect. Medical expenses are already limited to amounts exceeding 7.5 percent of adjusted gross income Dawson U.S. Tax Court Opinions: Joyce Ann Linzy , and now high-income taxpayers will face an additional reduction through the overall itemized deduction limitation.
The mortgage interest deduction faces similar treatment, where the existing limitations on loan amounts and qualifying debt types are supplemented by the new overall limitation for high-income taxpayers. Taxpayers itemizing deductions must consider the limits on deducting home mortgage interest as a personal expense, with excess amounts potentially qualifying for business deductions in certain circumstances IRS – Instructions for Form 8829, Expenses for Business Use of Your Home .
State and Local Tax Deduction Modifications
The One Big Beautiful Bill includes significant modifications to the state and local tax (SALT) deduction that interact with the overall itemized deduction framework. The applicable limitation amount increases to $40,000 in 2025, $40,400 in 2026, with 1% annual increases through 2029, before reverting to $10,000 in 2030 One Big Beautiful Bill Act: Sec. 70120. Limitation on individual deductions for certain state and local taxes, etc .
The SALT deduction includes income-based phase-downs for higher earners. For taxable years beginning before 2030, the applicable limitation amount is reduced by 30 percent of the excess of the taxpayer’s modified adjusted gross income over threshold amounts of $500,000 in 2025, $505,000 in 2026, with annual increases thereafter One Big Beautiful Bill Act: Sec. 70120. Limitation on individual deductions for certain state and local taxes, etc . However, the reduction cannot result in the applicable limitation amount being less than $10,000 One Big Beautiful Bill Act: Sec. 70120. Limitation on individual deductions for certain state and local taxes, etc .
Charitable Contribution Deduction Enhancements
The legislation includes enhancements to charitable contribution deductions for non-itemizers. The above-the-line charitable deduction for non-itemizers increases from $300 ($600 for joint filers) to $1,000 ($2,000 for joint filers) and becomes permanent One Big Beautiful Bill Act: Sec. 70424. Permanent and expanded reinstatement of partial deduction for charitable contributions of individuals who do not elect to itemize . This provision allows taxpayers who claim the standard deduction to still receive tax benefits for charitable giving.
Effective Dates and Implementation Timeline
The new itemized deduction limitation applies to taxable years beginning after December 31, 2025 One Big Beautiful Bill Act: Sec. 70111. Limitation on tax benefit of itemized deductions , providing taxpayers with time to plan for the changes. The mortgage interest deduction enhancements also apply to taxable years beginning after December 31, 2025 One Big Beautiful Bill Act: Sec. 70108. Extension and modification of limitation on deduction for qualified residence interest , creating coordinated implementation.
The state and local tax deduction modifications apply to taxable years beginning after December 31, 2024 One Big Beautiful Bill Act: Sec. 70120. Limitation on individual deductions for certain state and local taxes, etc , implementing one year earlier than other itemized deduction changes. The enhanced charitable contribution deduction for non-itemizers applies to taxable years beginning after December 31, 2025 One Big Beautiful Bill Act: Sec. 70424. Permanent and expanded reinstatement of partial deduction for charitable contributions of individuals who do not elect to itemize .
Interaction with Alternative Minimum Tax
The itemized deduction changes will interact with Alternative Minimum Tax calculations in complex ways. Under existing law, individuals subject to the alternative minimum tax are not allowed a deduction for any miscellaneous itemized deduction , and the new overall limitation will create additional considerations for AMT planning.
The Tax Cuts and Jobs Act increased the amount of income exempt from AMT , and the One Big Beautiful Bill’s itemized deduction limitations will affect the interaction between regular tax and AMT calculations for high-income taxpayers.
Historical Context and Policy Implications
The new itemized deduction limitation represents a return to concepts similar to the previous overall limitation on itemized deductions that was suspended. For tax years beginning after 2017, there was no limitation on itemized deductions based on AGI under the Tax Cuts and Jobs Act IRS – Publication 525: Taxable and Nontaxable Income , but the One Big Beautiful Bill reintroduces limitations with a different structure.
Historical itemized deduction limitations applied to taxpayers with adjusted gross income above specified thresholds, with the limitation reducing otherwise allowable itemized deductions . The new limitation uses a different calculation method but serves a similar policy purpose of limiting tax benefits for high-income taxpayers.
Administrative and Compliance Considerations
The new itemized deduction limitation will require updated tax preparation software and forms to properly calculate the reduction. Taxpayers and tax preparers will need to account for estimated itemized deductions in withholding calculations, including the impact of the new limitation Treasury Reg. Treasury Regulation 31.3402(m)-1 .
The coordination requirements between different limitation provisions will create complexity in tax preparation. Changes in adjusted gross income can affect various deduction thresholds, including the medical expense deduction threshold, creating cascading effects throughout the tax calculation Treasury Reg. Treasury Regulation 301.6501(c)-1 .
Economic Impact on Taxpayer Behavior
The new limitations may influence taxpayer behavior regarding itemized versus standard deduction elections. With the enhanced standard deduction amounts under the One Big Beautiful Bill and the new limitations on itemized deductions for high-income taxpayers, more taxpayers may find the standard deduction more beneficial.
The mortgage interest deduction enhancements, particularly the permanent treatment of mortgage insurance premiums, may influence homebuying decisions and refinancing strategies. The certainty provided by making the $750,000 limitation permanent removes uncertainty that existed under the previous sunset provisions.
The medical expense deduction continues to provide important tax relief for taxpayers with significant medical costs, though high-income taxpayers will face additional limitations through the overall itemized deduction cap. This may influence timing strategies for elective medical procedures and health savings account utilization.
Sources
- One Big Beautiful Bill Act – Section 70111
- One Big Beautiful Bill Act – Section 70108
- One Big Beautiful Bill Act – Section 70120
- One Big Beautiful Bill Act – Section 70424
- Tax Foundation Analysis of One Big Beautiful Bill
- IRS IRM 21.6.4
- Treasury Regulation 1.213-1
- IRS Publication 525
- IRS Publication 504
Try Your AI Tax Assistant for Free!
Ready to transform your practice with agentic AI in tax? See firsthand how our cutting-edge AI tax tools can revolutionize your approach to tax research and planning.