Prior to 2018 certain individual taxpayers were subject to an overall limitation on itemized deductions known as the “Pease limitation.” This limitation was suspended through 2025 by the TCJA. In 2026, the Pease limitation, if reinstated, is expected to apply to taxpayers with adjusted gross income above the following thresholds: $339,850 for single filers, $373,850 for head of household filers, and $407,850 for married joint filers. A taxpayer subject to the Pease limitation was generally required to reduce itemized deductions by three percent of the amount by which the taxpayer’s adjusted gross income exceeds the applicable income threshold.
Additionally, the value of a taxpayer’s itemized deductions depends on the taxpayer’s marginal income tax rate. For instance, generally, for a taxpayer in the 37 percent individual income tax bracket, each dollar of itemized deductions has a value of $0.37
OBBBA permanently repeals the Pease limitation and replaces it with a new overall limitation on itemized deductions.
- Caps the value of each dollar of itemized deductions at $0.35, in most cases.
- Only applies to taxpayers in the highest individual income tax bracket (37%).
- This new limitation is effective for years beginning after Dec 31, 2025.
Taxpayers are required to decrease the value of itemized deductions, which would otherwise be deducted at the highest individual income tax rate (37 percent), by a factor of 2/37.
The portion of itemized deductions subject to this reduction is the lesser of:
- Total itemized deductions or
- The amount by which taxable income (prior to itemized deductions) surpasses the income threshold of the highest individual income tax rate for single filers.
Example (2026):
Taxpayer’s Itemized Deductions are: $90,000
Taxable income before Itemized Deductions: $700,000
The 2026 (estimated) threshold for the 37% tax rate single filers is: $639,275
The excess: $60,725 ($700,000 - $639,275) Use this amount because it is less than $90,000.
Itemized Deductions Reduction: $3,282 ($60,725 x 2/37)
Exclusion for Qualified Business Income Deduction Calculation:
- The section clarifies that the limitations on itemized deductions (as described in IRC Section 68) do not apply when calculating deductions for qualified business income under Sec 199A.
- Changes have been made to ensure that certain income deductions, specifically for agricultural and horticultural cooperatives, accurately reflect this exclusion.
Additionally, this limitation does not raise the effective marginal tax rate on extra income. If the taxpayer's adjusted gross income (AGI) increases by $1, it would still be taxed at the top marginal rate of 37 percent. Thus, this limitation does not affect decisions related to work, saving, and investment in the same manner as the Pease provision. This calculation will be performed by your software.
Effective Date: Years after December 31, 2025