Individual Taxation: Adjustments & Deductions

Why this topic matters

Deductions changed more than anything else under the One Big Beautiful Bill Act (OBBBA) of July 2025, and its 2025 provisions became testable on Taxation and Regulation (REG) from July 1, 2026. This topic covers adjustments to reach adjusted gross income (AGI), the standard deduction, itemized deductions, the new temporary deductions for tips, overtime, seniors, and car loan interest, and the qualified business income (QBI) deduction. Figures below are for tax year 2026 unless stated.

Adjustments to income ("above the line")

These reduce AGI and are available whether or not the taxpayer itemizes:

• Deductible contributions to a traditional individual retirement account (IRA) and to self-employed retirement plans (a simplified employee pension (SEP), a Savings Incentive Match Plan for Employees (SIMPLE), or a solo 401(k)).
• Health savings account (HSA) contributions made directly by the taxpayer (2026 limits $4,400 self-only, $8,750 family).
• Half of self-employment tax, and self-employed health insurance premiums.
• Student loan interest up to $2,500 (phased out at higher incomes; not for married filing separately).
• Educator expenses up to $300 for eligible K–12 teachers.
• Alimony paid under divorce agreements executed before 2019.
• Penalty on early withdrawal of savings; moving expenses for active-duty military only.

Standard deduction

Filing status	2026 standard deduction
Single or married filing separately	$16,100
Married filing jointly or qualifying surviving spouse	$32,200
Head of household	$24,150

• An additional standard deduction applies for taxpayers who are 65 or older or blind.
• A dependent's standard deduction is limited to the greater of a small indexed floor or earned income plus a small amount.
• Married filing separately: if one spouse itemizes, the other must itemize.
• Personal exemptions are permanently zero under OBBBA.

New temporary deductions (tax years 2025 through 2028)

These are taken below the line — they reduce taxable income, not AGI — and are available to itemizers and non-itemizers alike.

Deduction	Limit	Phase-out (modified AGI)
Qualified tips (occupations that customarily received tips before 2025)	Up to $25,000 per return	Reduced by $100 per $1,000 above $150,000 ($300,000 joint)
Qualified overtime — the premium portion ("half" of time-and-a-half) required by the Fair Labor Standards Act (FLSA)	Up to $12,500 ($25,000 joint)	Same as tips
Senior deduction — each individual aged 65 or older	$6,000 per qualifying person	Reduced by 6% of modified AGI above $75,000 ($150,000 joint)
Car loan interest — loans after 2024 for a new personal-use vehicle with final assembly in the United States	Up to $10,000	Reduced by $200 per $1,000 above $100,000 ($200,000 joint)

The tips and overtime amounts stay in gross income (and are still subject to payroll taxes); married taxpayers must file jointly, and a valid Social Security number is required.

Itemized deductions (Schedule A)

Deduction	Key rules
Medical and dental	Only the amount above 7.5% of AGI. Includes health insurance paid with after-tax dollars, prescriptions, doctors, hospital, medically necessary travel, and long-term care premiums (limited by age). Excludes cosmetic surgery and non-prescription drugs (except insulin).
State and local taxes (SALT)	Income (or sales) tax, real property tax, and personal property tax, capped at $40,400 for 2026 ($20,200 married filing separately) — the $40,000 cap for 2025 rises 1% a year through 2029 and returns to $10,000 in 2030. The cap is reduced by 30% of modified AGI above $505,000 (2026), but never below $10,000. Federal income taxes are never deductible.
Home mortgage interest	Interest on up to $750,000 of acquisition debt ($375,000 married filing separately) on a main and second home — made permanent; debt from before December 16, 2017 keeps the $1 million limit. Home equity interest is deductible only if used to buy, build, or improve the home. Mortgage insurance premiums are deductible again from 2026.
Investment interest	Limited to net investment income; excess carries forward indefinitely. Qualified dividends and long-term gains count only if the taxpayer elects to tax them at ordinary rates.
Charitable contributions	Cash to public charities: up to 60% of AGI. Capital gain property to public charities: fair market value, up to 30%. Private foundations: 30% (cash) or 20% (capital gain property). Excess carries forward 5 years. From 2026, only contributions above 0.5% of AGI are deductible.
Casualty and theft losses	Personal losses only in federally declared disasters (and certain state-declared disasters from 2026): each loss reduced by $100, then the total by 10% of AGI.
Gambling losses	From 2026, 90% of losses, limited to gambling winnings.
Miscellaneous itemized deductions subject to the 2% floor	Permanently eliminated (unreimbursed employee expenses, tax preparation fees, investment advisory fees) — except educator expenses.

Charitable contribution details

• Ordinary income property (inventory, short-term assets) is deductible at the lesser of basis or fair market value.
• Contributions of services are not deductible, but out-of-pocket costs (and charitable mileage) are.
• Substantiation: a contemporaneous written acknowledgment for any gift of $250 or more; appraisals for noncash gifts over $5,000.
• If a donor receives benefits (a dinner), only the excess over the benefit's value is deductible.
• Non-itemizers may deduct up to $1,000 ($2,000 joint) of cash gifts to public charities from 2026 (not donor-advised funds).

Limit for the top bracket

From 2026, taxpayers in the 37% bracket have itemized deductions reduced (by 2/37 of the lesser of itemized deductions or income above the 37% threshold), so each deduction saves at most about 35 cents per dollar.

Qualified business income deduction (Section 199A)

• Made permanent by OBBBA at 20% of qualified business income from partnerships, S corporations, and sole proprietorships (plus 20% of qualified real estate investment trust dividends and publicly traded partnership income).
• Overall limit: 20% of taxable income before the deduction, minus net capital gain.
• Above an indexed taxable income threshold, the deduction is limited to the greater of 50% of W-2 wages or 25% of W-2 wages + 2.5% of the unadjusted basis of qualified property, and specified service trades or businesses (health, law, accounting, consulting, financial services — where the principal asset is the owners' skill) lose the deduction. These limits phase in over a range that OBBBA widened to $75,000 ($150,000 joint) from 2026.
• From 2026, a minimum deduction of $400 applies for taxpayers with at least $1,000 of QBI from active businesses in which they materially participate.
• QBI excludes wages earned as an employee, guaranteed payments, reasonable compensation from an S corporation, and investment income.

How it is tested

• Classify a deduction as an adjustment, itemized, or below-the-line.
• Compute deductible medical expenses, SALT, or charitable deductions with limits.
• Apply the new OBBBA deductions and phase-outs.
• Compute the QBI deduction below the threshold.