Paying the 2025 Tax Bill: A Cap on Itemized Deductions

Dozens of major individual and business tax policies from the 2017 Tax Cuts and Jobs Act (TCJA) will expire at the end of 2025. The Joint Committee on Taxation estimates that extending those expiring tax cuts will cost $4.1 trillion over 10 years. With U.S. debt held by the public nearing $29 trillion and rapidly climbing, lawmakers must offset, or pay for, tax cut extensions to avoid making the fiscal situation worse. BPC evaluated a series of offset options in December, working with the Tax Foundation’s dynamic Taxes and Growth (TAG) macroeconomic model on revenue and economic estimates. While not BPC endorsements, these policy options highlight the tradeoffs inherent in achieving fiscally responsible tax reform. 

Below we consider a new option: capping itemized deductions. 

Itemized Deductions Under Current Law 

A tax deduction reduces taxable income for the person claiming it. When filing a tax return, individuals or couples can choose to claim the standard deduction or itemize their deductions. The standard deduction is a flat dollar amount by which taxpayers can reduce their taxable income. In 2025, it is $15,000 for single taxpayers and $30,000 for married couples, with those levels adjusted each year for inflation. 

On the other hand, itemized deductions are a variety of tax preferences that reduce taxable income for those with eligible expenses. The most common itemized deductions are for state and local taxes (SALT), mortgage interest (the MID), charitable contributions, and medical expenses. 

Some itemized deductions, like the MID, have long had their own distinct limits. Before TCJA, there was also an indirect limit on itemized deductions: the alternative minimum tax (AMT). The AMT eroded the value of SALT deductions by levying a minimum tax rate on high-income taxpayers subject to the AMT.  

TCJA made major changes to tax deductions. It doubled the standard deduction at a cost of $720 billion over 10 years and limited several itemized deductions to pay for these changes—most notably SALT and the MID—raising $668 billion over 10 years. TCJA also modified AMT rules so that far fewer taxpayers are subject to it. All of these changes are temporary, in effect from 2018 through 2025. 

Before TCJA, around two-thirds of taxpayers took the standard deduction, and the remaining one-third itemized their deductions. After TCJA, 90% of taxpayers take the standard deduction and just 10% itemize. 

Both the standard deduction and itemized deductions reduce tax revenue coming into the federal government, though both the Joint Committee on Taxation (JCT) and the Treasury Department define the standard deduction as part of a “normal” tax system and therefore not a tax expenditure. Itemized deductions will collectively reduce federal tax revenue by tens of billions of dollars in the current fiscal year (2025), and by hundreds of billions of dollars if TCJA expires because many more taxpayers are expected to itemize again.

Extending TCJA’s doubled standard deduction costs $1.22 trillion over 10 years to extend, and itemized deduction limits raise $1.07 trillion over 10 years, for a net cost of $148 billion.

Itemized Deductions Cap Option

Lawmakers interested in an itemized deductions cap have several options at their disposal:

• A dollar amount cap on all itemized deductions (e.g., $25,000), with the option to adjust the cap for filing status and for inflation;
• A percent-of-income cap on all itemized deductions (e.g., 4% of adjusted gross income); or
• A percent-of-deduction cap on the value of all itemized deductions. While a taxpayer in the 35% bracket would typically see itemized deductions reduce her tax liability by 35%, this option would cap that value at a certain percentage (e.g., 15%).

The percent-of-deduction cap may represent the best balance between simplicity, economic efficiency, and horizontal and vertical equity. We discuss the other two options in “Alternatives” below.

Why This Option

Lawmakers could extend both TCJA’s doubled standard deduction and its limits on itemized deductions without substantially increasing deficits while preserving the benefits of TCJA’s larger standard deduction. Specifically, this would continue lower tax bills for low- and middle-income taxpayers and simpler, quicker filing for millions who used to take itemized deductions and now take the standard deduction. Many lawmakers, however, are pushing for an increase in TCJA’s $10,000 SALT cap.

An overall cap on itemized deductions could pay for any increase in the SALT cap without undercutting the “relief” that some lawmakers in high-cost, high-tax states are seeking for their constituents.

The overall itemized deduction cap also has a history of bipartisan support. During the 2012 presidential campaign then-candidate Mitt Romney proposed a dollar cap on itemized deductions , while then-President Obama proposed a cap based on the taxpayer’s tax bracket.

An overall cap on deductions also has an advantage over limits or caps on specific itemized deductions because an overall cap does not favor one deduction over another.

Finally, an overall cap on itemized deductions could improve upon the pre-TCJA Pease limitation, which was “structured more like an income surtax” than a deduction cap.

Revenue Effects

CBO estimated in December 2024 that limiting itemized deductions to 15% of their total value would raise $1.9 trillion over 10 years. Importantly, these estimates are on a current law baseline that assumes TCJA expires. If an itemized deduction cap were scored in conjunction with TCJA permanency, the amount of revenue raised would be significantly lower, though it would still likely raise hundreds of billions of dollars over 10 years.

Potential Drawbacks

As with any tax increase, a cap on itemized deductions could marginally reduce incentives for some moderate- and high-income taxpayers to work or invest. Because this cap targets the value of itemized deductions rather than income, we expect it to have fewer negative effects than tax rate increases of similar size.

Depending on design, a cap could also make the tax code more complex. Any cap is more complicated than eliminating itemized deductions wholesale, as was recommended by BPC’s Debt Reduction Task Force in 2010. While eliminating itemized deductions would simplify the tax code and raise revenue to reduce tax rates and the deficit, neither party has mustered support for such a policy, making this option a non-starter in Congress.

If an overall itemized deduction cap is paired with continued limits on SALT, that overall limit would primarily affect charitable contributions and the MID. Any increase in the after-tax cost of giving could decrease charitable contributions, while limits on the MID would raise taxes for homeowners particularly with high mortgage payments. Lawmakers might prefer to directly reform the charitable deduction or the MID instead, and BPC has outlined some options for doing so. 

Alternatives

A hard dollar cap would be relatively simple and progressive, but it could significantly raise taxes for upper middle- and high-income taxpayers who have disproportionately large amounts of itemized deductions. It would also reduce the incentive for charitable giving once a taxpayer has reached the cap.

A percent-of-income cap would arguably be fairer to taxpayers with high incomes than a hard dollar cap (by tying itemized deductions to income). On the other hand, it might raise less revenue than other options by continuing to allow for large deductions. Such a cap structure would also add complexity to the code.

Conclusion

As lawmakers explore relaxing TCJA’s limits on itemized deductions like SALT, an overall cap on itemized deductions could serve as an important backstop that helps make a 2025 tax package fiscally responsible.

Read BPC’s full set of offset options here and find all of BPC’s tax policy work at https://bipartisanpolicy.org/tax/.