Latest / VoraPrep Audio — Professional Licensure & Certification Exam Prep / [CPA] TCP: Mastering Individual Tax Planning: From TCJA to H.R. 1's New Landscape
Transcript
- Hey, welcome to VoraPrep Audio. Glad you could tune in. Let’s talk about a situation that you are absolutely going to face, both on the exam and in your career. Imagine your new clients, the Riveras, walk into your office. They're high-earning consultants, they live in a high-tax state like New York, and for years they have been frustrated by that ten-thousand-dollar cap on state and local tax deductions. It’s now early 2027, you're working on their 2026 return, and they’ve heard big changes are here. They ask you a simple question: "With the new laws, how much can we *finally* deduct? And what should we have done differently last year?" Your answer here isn't just about a number. It's about showing your value. So, to get this right, you have to understand where we're coming from. The baseline for the last several years was set by the Tax Cuts and Jobs Act, or TCJA. That law really changed the game for individuals. First, it nearly doubled the standard deduction, which made it way easier for most people to just take the standard and not even bother with itemizing. But the big one, the one that really hurt people in certain states, was capping the state and local tax—or SALT—deduction at a flat $10,000. It also tweaked other things, like limiting mortgage interest deductions. The result was that for most people, the main planning question just became: can I even scrape together enough itemized deductions to get over this huge new standard deduction? And for a lot of people, the answer was just… no. But that all changes for the 2026 tax year. This is what you'll see on the exam starting July 1st, 2026. A new piece of legislation, HR 1, also called the OBBBA legislation, comes in and shakes things up. The biggest change is to that SALT cap. For 2026, the cap gets a huge boost all the way up to $40,400. That’s a big deal. But, there’s a catch. This new, higher cap is phased out for high-income taxpayers. Here's how it works: that $40,400 limit is reduced by 30 percent of whatever Modified Adjusted Gross Income—or MAGI—you have over $505,000. And importantly, the deduction can't be reduced below a floor of $10,000. So, the highest earners will find themselves right back at that old TCJA limit. Think of it like a dimmer switch, not a hard on/off switch. As your income goes up past that half-million-dollar mark, the potential deduction gradually dims down. It doesn't just shut off completely. It's a slope, not a cliff. And HR 1 added a few other nice things, too. There are some new deductions you can take even if you don't itemize. These are called "above-the-line" deductions because they lower your AGI. For 2026, there’s a new exclusion for up to $25,000 of tip income, a new deduction for overtime pay, and even one for interest you pay on a car loan. These are available to everyone, which is a nice little bonus. So, when you get a question on this, how do you attack it? First, always, always check the tax year. Is it 2026 or later? That one fact changes everything. Then, what's the filing status? Married Filing Jointly? Single? You need that to know what the standard deduction is. Next, you'll want to add up all the potential itemized deductions. We're talking medical expenses over that 7.5% AGI floor, mortgage interest, charity... and of course, the state and local taxes, which is where the real work is. For that SALT deduction, you have to run the new 2026 calculation. Find the MAGI, see how much it’s over $505,000, and take 30 percent of that excess. That's your reduction amount. You subtract that from the $40,400 starting cap. And just remember, it can't go below $10,000. That's your allowable SALT deduction. Once you have that, you can total up all your itemized deductions and compare that number to the standard deduction. The client gets to take whichever is bigger. Simple as that. Finally, don't forget to check for those new above-the-line deductions—tips, overtime, car-loan interest. Those are separate from this whole itemized-versus-standard decision. For 2026, that standard deduction is still a high bar to clear. For a married couple filing jointly, it’s $32,200. So even with a more generous SALT cap, a lot of people will still be taking the standard. It really depends on their specific situation. Just think about it for a second. If you have a married couple, and they've got about $30,000 in regular itemized deductions each year, what's the smallest extra charitable gift they could make to make "bunching" their deductions worth it? Well, anything over $2,200. Because that little bit extra would push their total itemized deductions over the $32,200 standard. Let's actually run the numbers for our clients, the Riveras. They're married filing jointly. For 2026, their MAGI is $585,000. They paid $45,000 in state income taxes and another $20,000 in property taxes. Okay, let's walk through it. First, how much is their income over the threshold? The threshold is $505,000. So, $585,000 minus $505,000 gives us an excess of $80,000. Step two, we calculate the reduction. The rule is 30 percent of that excess. So, 30 percent of $80,000 is $24,000. This is the amount their cap gets reduced by. So for step three, we find their actual cap. It starts at $40,400. We subtract our reduction of $24,000. That gives us an allowable SALT cap of $16,400. That’s above the $10,000 floor, so that's their limit. Finally, we figure out their deduction. They paid a total of $65,000 in state and local taxes… but their cap is $16,400. So, they get to deduct the lesser of those two numbers. Their final SALT deduction for 2026 is $16,400. Now, the tempting-but-wrong answer on the exam would be $10,000. It’s so easy to see their income is over the threshold and just jump to the conclusion that their deduction drops all the way to the floor. But it's a gradual phase-out. You have to do the math. Don't fall for that trap. This also brings up a really powerful planning tool for clients who are right on the bubble of itemizing. It's called the deduction bunching strategy. The idea is to concentrate your controllable deductions into one year. The classic example is charitable giving. Let's say a client normally gives $10,000 to charity every year. Instead, they could give $20,000 in Year 1 and nothing in Year 2. That big gift in Year 1 might be just enough to push them over the standard deduction, so they get a benefit from itemizing. Then in Year 2, with no big gift, they just take the standard deduction. They get the best of both worlds. This is often done with something called a Donor-Advised Fund. The most common way people get this wrong on the exam is misinterpreting that SALT phase-out. I'll say it again because it's that important: the $505,000 MAGI threshold is not a cliff. It’s the start of a ramp. For every dollar of income over that line, they lose 30 cents of their potential deduction, until they hit that $10,000 floor. If you need a quick way to remember the big itemized deductions, just think that you have to BEAT the standard. B-E-A-T. B for Benevolent giving, your charitable contributions. E for Expensive medical, the amount over the AGI floor. A for Allowable interest, so, mortgage interest. And T for Taxes, your state and local taxes up to the new cap. If your B-E-A-T total beats the standard deduction, you itemize. And here’s a quick exam tip. If you get a big Task-Based Simulation with a ton of client documents and numbers, before you start calculating everything down to the penny, do a quick mental check. Add up the big items: the maximum SALT they could get, their mortgage interest, any big charitable gifts. If that total isn't even in the same ballpark as the standard deduction, like $32,200 for a married couple, you can be pretty confident they're taking the standard. That can save you a ton of time. If you're finding these deep dives helpful, you should know that VoraPrep is a full exam-prep app. It’s got lessons, thousands of practice questions, and an AI tutor all in one place. You can get started for free and see how it works for you. Just head over to Vora Prep dot com. So, to wrap it up: for 2026, remember HR 1 is in play. The SALT cap is up to $40,400, but it phases out for higher incomes—and that phase-out is gradual. The core decision is still standard versus itemized, and planning strategies like deduction bunching are more important than ever. You’ve got this. Keep up the great work, and I’ll talk to you on the next one.