Beginning on January 1, 2026, the One Big Beautiful Bill Act (the “OBBBA”) will place a limit on itemized deductions for taxpayers subject to the highest income tax bracket, which is currently set at 37 percent. Although the 2026 tax brackets are not available yet, for the 2025 tax year, the 37 percent bracket applies to trusts and estates that have taxable income in excess of $15,650.
This new limitation on below the line itemized deductions provides that itemized deductions that would otherwise be allowable during a tax year will be reduced by 2/37 (5.4 percent). In other words, the OBBBA will begin to cap the tax benefit at $0.35 for each dollar of these itemized deductions rather than the full $0.37 per dollar previously received by taxpayers in the highest income tax bracket. The 5.4 percent reduction will apply to the lesser of (1) itemized deductions otherwise allowed (excluding miscellaneous deductions, which are disallowed), or (2) the amount of taxable income to which the 37 percent bracket applies.
For example, assume your trust has $700,000 of taxable income and $300,000 of below the line itemized deductions. The lesser of the excess amount of the trust’s income over the 37 percent tax bracket or the amount of the trust’s itemized deductions is the amount of the trust’s available itemized deductions. In 2025, the 37 percent tax bracket begins at $15,650, so the amount that the trust exceeds the 37 percent bracket is $684,350 ($700,000 minus $15,650) which is greater than the trust’s amount of itemized deductions ($300,000). Therefore, the trust will lose roughly $16,200 (5.4 percent times $300,000) of itemized deductions. Effectively, this reduces the value of such itemized deductions to 35 percent rather than the full 37 percent. As a reminder, itemized deductions include trustee fees, personal representative fees, legal fees, accounting fees, and any charitable deductions using trust income.
The line itemized deduction limitations also apply to individuals and jointly filed returns who are in the 37 percent marginal income tax bracket.
Consequently, you should consider contacting your counsel to discuss how trust and estate expenses and possibly how your own itemized expenses should be paid and explore some of the following options:
- Consider use of or adopting a November 30, 2025 fiscal year, if permitted, so that the next fiscal year will begin on December 1, 2025. In doing so, the new limitation will not apply to either fiscal year.
- Consider paying itemized expenses in 2025, if possible, prior to the new limitation coming into effect.
- Consider deducting legal, trustee, and accounting fees on the estate tax return in the case of a taxable estate.
For additional information, please contact an attorney in Gunster’s Private Wealth Services or Tax group.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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