The IRC Section 68 overall limitation on itemized deductions returns in 2026 under a rewritten formula from the One Big Beautiful Bill Act. If your income crosses into the 37% federal tax bracket, your itemized deductions are cut by 2/37 (about 5.41%) of the smaller of two figures: your total itemized deductions, or the amount by which your income exceeds the bracket threshold. For 2026, that threshold is $640,600 for single filers and heads of household, $768,700 for married couples filing jointly, and $384,350 for married filing separately.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Below those thresholds, Section 68 does not apply.
The 2/37 Formula
The reduction equals 2/37 of the lesser of your total itemized deductions or the excess of your income over the point at which the 37% bracket begins.2Office of the Law Revision Counsel. 26 U.S. Code 68 – Overall Limitation on Itemized Deductions The statute references taxable income but directs you to add itemized deductions back in when making the comparison, which lines the trigger up with adjusted gross income.
The fraction 2/37 is about 5.41%. Because the affected taxpayers sit in the 37% bracket, the actual tax cost of the reduction is roughly 2% of the deductions involved (5.41% × 37%). It behaves like a small surtax on being a high-income itemizer rather than a dramatic slash at any single deduction.
A Worked Example
Say you file as single in 2026 with an AGI of $740,600 and $60,000 of itemized deductions. Your excess income above the $640,600 threshold is $100,000. Compare that to your $60,000 in deductions and take the smaller figure, which is $60,000. Multiply by 2/37: the reduction is $3,243 (rounded). Your allowable itemized deductions drop to $56,757, and at a 37% marginal rate you owe about $1,200 more in tax.
Flip the numbers. Same AGI, but $150,000 in itemized deductions. Now the $100,000 excess is the smaller figure, so the reduction is 2/37 of $100,000, or $5,405. Deductions fall to $144,595. The cut never exceeds 5.41% of whichever number is smaller, so it caps out regardless of how high your income climbs above the threshold.
The Steeper Cut on SALT Deductions
State and local tax deductions face a separate, larger reduction. Congressional analysis of the OBBBA indicates a 5/37 haircut (roughly 13.5%) applied specifically to SALT deductions, using the same income trigger as the general Section 68 rule. This runs on top of the SALT cap, which was raised to $40,000 for 2025 through 2029. Taxpayers in high-tax states feel the squeeze twice: the cap first, then the 5/37 reduction on whatever the cap leaves.
Which Deductions Are In Scope
The rewritten statute reduces “the amount of the itemized deductions otherwise allowable” without listing categories that escape the cut.2Office of the Law Revision Counsel. 26 U.S. Code 68 – Overall Limitation on Itemized Deductions Mortgage interest, charitable contributions, and post-cap SALT are all in the pool. The old Section 68 explicitly shielded medical expenses, investment interest, casualty and theft losses, and gambling losses.3Justia. 26 U.S.C. 68 – Overall Limitation on Itemized Deductions The publicly available text of the new version does not carry those carve-outs forward, so filers with large medical deductions in particular should watch for IRS guidance on the point.
Where Section 68 Sits in the Order
Section 68 applies after every other limitation on individual deductions has been calculated.2Office of the Law Revision Counsel. 26 U.S. Code 68 – Overall Limitation on Itemized Deductions The SALT cap, the mortgage interest ceilings, and the percentage-of-AGI floors on charitable and medical deductions all run first. Section 68 then takes its 2/37 from whatever remains.
If the reduction pushes your itemized total below the standard deduction, you would claim the standard deduction instead. Given a 5.41% ceiling on the cut, that only matters if your itemized total already sits close to the standard.
How This Differs from the Old Pease Limitation
Tax professionals still call any Section 68 rule the “Pease limitation,” but the mechanics have changed. The original Pease, in force from 1991 through 2017, cut deductions by 3% of the amount your AGI exceeded a threshold, capped at 80% of the affected deductions.3Justia. 26 U.S.C. 68 – Overall Limitation on Itemized Deductions The old formula grew with income; the new one caps out at 2/37 of your total deductions no matter how high your income goes. The Tax Cuts and Jobs Act suspended the old Pease for 2018 through 2025, and the OBBBA permanently repealed and replaced it rather than letting it snap back.4Tax Policy Center. How Did the TCJA and OBBBA Change the Standard Deduction and Itemized Deductions Projections built on the old 3%/80% math need to be redone.
One structural change matters beyond the formula: the old rule did not apply to estates and trusts. The new one does. Trusts reach the 37% bracket at far lower income levels than individuals, so fiduciaries with significant itemized deductions should factor the 2/37 reduction into distribution planning.
Planning Around the Limitation
The headline 5.41% cut is modest in isolation. A taxpayer with $80,000 of itemized deductions loses about $4,324 of them, costing roughly $1,600 in extra tax. The stack is what hurts: the SALT cap, the separate 5/37 SALT reduction, the AGI floors on charitable and medical deductions, and then Section 68 on top of all of it.
A few moves keep some flexibility. Bunching charitable contributions into a year when your income sits below the 37% threshold puts those deductions outside Section 68’s reach entirely. A donor-advised fund lets you front-load a large deduction in one year while spreading grants to charities over time. If you’re close to the threshold, shifting the timing of income or accelerating deductions can sometimes keep AGI under the trigger, though the coordination with estimated payments and withholding needs attention. And for taxpayers who are comfortably above the threshold every year, the practical question is not how to avoid Section 68 but how to size deductions knowing that roughly 5.41% of them (and about 13.5% of any post-cap SALT) will not survive the calculation.