Beginning in 2026, the modified “Pease” limitation returns, reducing the value of itemized deductions for high-income taxpayers. This adjustment effectively lowers the top-bracket deduction benefit from 37% to 35%, impacting wealthy individuals who rely on mortgage interest, charitable, and state/local tax deductions.
📌 What Is the Pease Limitation?
The Pease limitation, originally enacted in the 1990s, reduces the value of itemized deductions for high-income earners. It was suspended under the 2017 Tax Cuts and Jobs Act (TCJA) but is scheduled to return in 2026. The modified version does not fully eliminate deductions but caps their value by lowering the marginal tax benefit from the top rate of 37% down to 35%.
For taxpayers in the highest bracket, this means that instead of saving $0.37 on the dollar for each deductible expense, the benefit will drop to $0.35, creating an effective surtax on deductions.
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💡 How the 37% → 35% Reduction Works
The mechanism is subtle but powerful. The IRS calculates your tax savings from itemized deductions at your bracket rate. With the Pease cap, top-bracket filers lose 2% of their marginal deduction value.
| Deduction Amount | Benefit @ 37% | Benefit @ 35% (2026) | Lost Benefit |
|---|---|---|---|
| $100,000 | $37,000 | $35,000 | $2,000 |
| $500,000 | $185,000 | $175,000 | $10,000 |
In practice, the more deductions you claim, the more the reduction pinches your tax savings.
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📑 Who Will Be Affected in 2026?
The Pease limitation primarily affects:
- Taxpayers in the top income bracket (income above approx. $700k single / $850k joint by 2026 inflation adjustments).
- Filers with significant mortgage interest deductions.
- High earners claiming large charitable contributions.
- Taxpayers with high state and local taxes (SALT), especially in high-tax states.
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🛠️ Tax Planning Strategies Before 2026
- Bunch deductions into 2025 while they are still valued at 37%.
- Explore donor-advised funds for charitable giving flexibility.
- Consider Roth conversions in 2025 to lock in lower rates.
- Evaluate SALT exposure and possible relocation/timing strategies.
Early planning ensures that high-income filers reduce the sting of the Pease limitation once it resumes.
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