The July 4, 2025 law keeps the Pease limitation repealed but introduces a new high-income limitation tied to the 37% bracket. This guide breaks down how the rule works, which itemized deductions are affected, and the planning moves U.S. high earners can use to protect their Schedule A value.
Updated: August 15, 2025 • Audience: U.S. Individual Taxpayers • Keywords: itemized deduction limits 2025, Pease repeal, 37% bracket limitation, high earner tax planning, Schedule A haircut, SALT cap strategy, charitable bunching, mortgage interest rules
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Table of Contents
- 1) Pease Repeal vs. the New Rule — The Big Picture
- 2) How the 37%-Bracket Limitation Works
- 3) Which Itemized Deductions Are Affected (and Which Aren’t)
- 4) Quick Comparison: Old Pease vs. New High-Bracket Limit
- 5) Planning Ideas for High Earners
- 6) Real-World Examples
- 7) Frequently Asked Questions
- Disclaimer & Update Watch
1) Pease Repeal vs. the New Rule — The Big Picture
Pease Limitation (Gone)
The pre-2018 Pease rule reduced itemized deductions by a percentage of income above a threshold. Under the new law, Pease remains repealed.
New High-Bracket Limitation
Instead of Pease, high-income filers in or above the 37% bracket face a targeted limitation that reduces the benefit of some Schedule A deductions once income crosses specified thresholds.
Why It Matters
The design aims to preserve deductions for most households while curbing benefits for top-bracket taxpayers—changing the calculus for timing SALT, mortgage interest, and charitable giving.
Bottom line: No more Pease math, but top-bracket filers still face a haircut on certain itemized deductions through the new limitation mechanics.
2) How the 37%-Bracket Limitation Works
The new regime applies once your taxable income (by filing status) enters the 37% bracket. From that point, a separate limitation formula reduces the allowable amount (or marginal value) of certain itemized deductions.
- Trigger: Income at/above the 37% bracket threshold for your status (indexed annually).
- Mechanics: A reduction applies to targeted deduction categories; the haircut may phase in across a band of income or cap the benefit at/under a set rate.
- Floor: Some deduction classes retain minimum allowances; others may be unaffected.
- Coordination: The limitation operates after the SALT cap and other statutory floors (e.g., medical 7.5% of AGI).
Action: Each filing season, check the IRS instructions for the current thresholds and any categories subject to the high-income reduction.
3) Which Itemized Deductions Are Affected (and Which Aren’t)
Commonly Affected (subject to statute/guidance)
- State & Local Taxes (SALT): Effectively limited first by the SALT cap, then may be impacted by the high-income limitation.
- Mortgage Interest: Acquisition indebtedness rules apply; high-bracket limitation may trim value at the margin.
- Charitable Contributions: Still deductible within AGI percentage limits; high-income limitation can reduce net benefit in the top bracket.
- Misc. Itemized (where permitted): Categories allowed under current law can be affected at high incomes.
Typically Unaffected / Separate Rules
- Medical expenses (subject to the 7.5% AGI floor first).
- Casualty and theft losses in federal disasters (statutory rules apply).
- Investment interest (capped by investment income; coordination rules apply).
- Any category explicitly excluded from the high-income reduction by statute or later guidance.
Heads-up: The interaction of multiple limits (SALT cap, AGI floors, charitable AGI limits, and the 37%-bracket limitation) can materially change your Schedule A total.
4) Quick Comparison: Old Pease vs. New High-Bracket Limit
| Feature | Pease (Repealed) | New 37%-Bracket Limitation |
|---|---|---|
| Trigger | AGI above fixed thresholds; % reduction of total itemized deductions | Taxable income in/above the 37% bracket threshold |
| Scope | Broad haircut across Schedule A with exceptions | Targeted reduction on specified categories after other caps/floors |
| Interaction with SALT | Applied on top of SALT rules in prior years | Applies only after the SALT cap (cap still bites first) |
| Indexing | Thresholds adjusted periodically | Threshold tied to 37% bracket; indexed annually |
| Planning Complexity | High—multi-variable phase-outs | High—requires careful timing of deductions and income |
5) Planning Ideas for High Earners
Charitable Optimization
- Bunch gifts into a single year (e.g., donor-advised fund) to clear the standard deduction and maximize Schedule A.
- Use appreciated securities instead of cash to avoid capital gains tax and preserve deduction value.
- Coordinate with AGI percentage limits and the high-income haircut for the best net benefit.
SALT & Mortgage Strategy
- Time property tax installments and state estimates only if you’re not in AMT and you’ll actually benefit under the cap.
- Keep mortgage debt as acquisition indebtedness; trace refis carefully to protect interest deductibility.
- Model whether extra principal payments or rate/term refi is smarter when deduction value is haircut in the top bracket.
Income & Timing Levers
- Manage entry into the 37% bracket by timing bonuses, RSUs, Roth conversions, and large capital gains.
- Max out pre-tax deferrals (401(k), HSA, FSA) to keep taxable income below the threshold when feasible.
- Consider a multi-year plan: itemize in big-deduction years, take standard in off years.
AMT & State Conformity
- Remember: SALT is disallowed under AMT; a top-bracket haircut may be moot if AMT applies.
- States differ—some don’t follow the federal cap/limitation; run federal + state combined scenarios.
- Business owners: assess PTET elections to convert personal SALT to deductible entity-level tax (state-specific).
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6) Real-World Examples
Example A — MFJ on the Cusp of 37%
Facts: Couple’s taxable income hovers just below the 37% threshold; large year-end donation planned.
Move: Max 401(k)/HSA and defer a bonus to remain below the threshold so the high-income limitation doesn’t trim their charitable benefit.
Example B — Single in Top Bracket with Big SALT & Mortgage
Facts: SALT already capped; substantial mortgage interest; consistent top-bracket income.
Move: Expect some haircut on Schedule A categories. Consider DAF bunching and evaluate paying down mortgage vs. reduced deduction value.
Example C — HOH with Appreciated Stock Gifts
Facts: Charitable giving is meaningful every year; income sometimes crosses into the top bracket.
Move: Gift appreciated shares in high-income years to avoid capital gains, then alternate with standard deduction years.
Example D — Business Owner Weighing PTET
Facts: Significant pass-through income; high SALT; in 37% bracket.
Move: Model a PTET election to convert personal SALT into entity-level deductions (state-dependent) and blunt the Schedule A haircut.
7) Frequently Asked Questions
Is Pease coming back?
No. Under the 2025 reform, Pease remains repealed. Instead, high earners face the new 37%-bracket limitation.
Does the new limitation apply to all itemized deductions?
No. It targets specific Schedule A categories and coordinates with existing caps and floors. Always check the current IRS instructions.
How do I know if I’m in the 37% bracket?
Compare your taxable income to the annual indexed thresholds for your filing status. Your software or CPA will flag the threshold crossing.
Can charitable giving still reduce my tax if I’m in the top bracket?
Yes—especially with DAF bunching and appreciated stock gifts—but the net benefit may be smaller due to the high-income limitation.
What about AMT?
AMT can override Schedule A benefits (e.g., SALT is disallowed). Run both regular tax and AMT scenarios before year-end moves.
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Update Watch: Before filing, review current Form 1040 Schedule A instructions, IRS inflation adjustments for the 37% bracket, SALT cap guidance, and charitable AGI-limit rules.
