Itemized Deduction Limitation

Author: Preston Brashers

TOPLINE:

The One Big Beautiful Bill (OBBB) changed the limitation on itemized deductions so that it only applies to taxpayers in the top income tax bracket.

BACKGROUND:

The Pease Limitation was enacted in the early-1990s and reduced taxpayers’ itemized deductions as their adjusted gross income (AGI) increased. For every $100 the taxpayer’s income rose above an upper-middle-income AGI threshold, the Pease Limitation reduced deductions by $3. So, taxpayers in the limitation range were effectively taxed on $103 of income for every additional $100 they earned. The Pease Limitation was designed such that it would reduce taxpayers’ itemized deductions by 80%, but no further.

The 2017 TCJA streamlined individual taxes by lowering tax rates and eliminating many itemized deductions and the Pease Limitation. However, the elimination of the Pease Limitation was temporary, and it was scheduled to return in 2026.

What OBBB Did:

• Replaced the Pease Limitation with a permanent new itemized deduction limitation in 2026.
  • The new limitation reduces taxpayers’ itemized deductions if they are in the top tax bracket.
  • The limitation is 2/37 × the lesser of (a taxpayer’s itemized deductions or the taxpayer’s taxable income earned in the top tax bracket).

EXAMPLE:

Consider a single taxpayer with $100,000 of itemized deductions.

• The top tax bracket (single) starts at $640,600 of taxable income.
• Once the taxpayer reaches $640,600 of taxable income, for every $37 of additional income he earned, he would lose $2 of itemized deductions.
• Once his income reaches $740,600 ($100,000 in the top bracket), his itemized deductions would be less than his top-tax-bracket income.
• Beyond that, he could earn more income without reducing itemized deductions, but he could only claim $35 out of each additional $37 in itemized deductions.

Why It Matters?

• Itemized deduction limitations that are income-based act like a higher marginal tax rate and discourage work.

Where Can I Find Changes?

OBBB Section 70111;   26 U.S.C. § 68.

BOTTOMLINE:

The limitation is a hidden 39% tax bracket inside the 37% tax bracket.

This memo is part of the One Big Beautiful Booklet, a collection of more than 60 memos that examine and summarize the major aspects of the One Big Beautiful Bill – the signature legislative achievement of President Trump and the 119th Congress.