Overview
The Itemized Deduction Limitation, often referred to as the Pease Limitation, is a federal tax rule that reduces the total amount of itemized deductions certain high-income taxpayers can claim on their tax returns. It targets specific deductions to prevent very high earners from drastically lowering their taxable income. Although temporarily suspended under current law through 2025 by the Tax Cuts and Jobs Act (TCJA), it remains an important concept for tax planning.
History and Purpose
Named after Ohio Congressman Don Pease, the limitation originated in the Taxpayer Relief Act of 1990. It was introduced to enhance fairness in the tax system by limiting tax relief for higher-income individuals. Specifically, the Pease Limitation reduces itemized deductions by 3% of the amount a taxpayer’s adjusted gross income (AGI) exceeds a defined threshold, with a cap at an 80% reduction of eligible itemized deductions.
This limitation excludes certain deductions such as medical expenses above a threshold, investment interest, and casualty losses. While repealed during 2018 through 2025 by the TCJA, lawmakers may revisit or reinstate it in future tax legislation.
How the Pease Limitation Works
If your AGI surpasses the threshold for your filing status, your total itemized deductions (like mortgage interest, charitable donations, state and local taxes) are reduced by 3% of the amount your income exceeds the threshold. The reduction cannot exceed 80% of your total deductions.
For example, if your AGI is $300,000 and the threshold is $250,000, the excess is $50,000. The limitation reduces your itemized deductions by $1,500 (3% of $50,000). If you initially had $20,000 in deductions, you could now claim only $18,500.
Who Does It Affect?
Primarily, the Pease Limitation affects taxpayers with higher incomes. Thresholds vary by filing status and adjust annually for inflation. Historically, typical thresholds have been around:
- Single filers: $250,000
- Married filing jointly: $300,000
- Head of household: $275,000
These levels are approximate and may change with new tax laws or inflation adjustments.
Examples
- Homeowner: You have $30,000 in mortgage and property tax deductions, but due to exceeding the income threshold, a portion of these deductions is reduced, decreasing your tax savings.
- Philanthropist: Large charitable donations totaling $50,000 get partially phased out, lowering the overall tax benefit.
Strategies to Manage the Limitation
- Bunch Deductions: Combine multiple years’ deductible expenses, such as charity, into a single year to maximize itemization benefits.
- Use Tax Credits: Prefer tax credits when possible since they reduce tax liability dollar-for-dollar and are unaffected by the Pease Limitation.
- Professional Tax Planning: Consult a tax advisor to optimize income and deductions to reduce or avoid the phase-out.
Common Misunderstandings
- The Pease Limitation does not eliminate itemized deductions entirely but limits their amount based on income.
- It only applies to certain itemized deductions; medical expenses and investment interest are generally exempt.
- It does not impact the standard deduction.
Current Status and FAQs
- Is the Pease Limitation still in effect?
It is suspended through 2025 under the TCJA but may return depending on future legislation. - How to know if it affects you?
Review your AGI and itemized deductions annually and seek professional advice. - Can the standard deduction help?
Yes, when itemized deductions are significantly reduced, the standard deduction might offer a better tax benefit.
Summary Table
| Feature | Detail |
|---|---|
| What it affects | Specific itemized deductions |
| Income threshold | Varies by filing status (e.g., $250K+ single) |
| Reduction rate | 3% of income above threshold (historical) |
| Max reduction | Up to 80% of deductions (historical) |
| Exclusions | Medical expenses, investment interest, casualty losses |
| Current status | Suspended through 2025 (TCJA) |
Sources and Further Reading
- IRS Publication 17: Your Federal Income Tax
- IRS Topic No. 502: Itemized Deductions
- Investopedia: Pease Limitation
- Tax Foundation: The Pease Limitation and the TCJA
Understanding the Pease Limitation can help high-income taxpayers plan their deductions efficiently and prepare for future tax law changes. Always refer to the latest IRS guidance or consult a tax professional for personalized advice.