How Did the Pease Limitation Work (and Why Was It Repealed?)

Tax deductions are supposed to make taxable income smaller. The Pease limitation added a plot twist: once a taxpayer’s income became sufficiently large, some of those deductions began shrinking again. It was the tax-code equivalent of receiving a coupon and then learning that the discount fades as your wallet gets heavier.

Named for former Ohio Congressman Donald J. Pease, the rule applied primarily to high-income taxpayers who itemized deductions. It did not simply place a fixed ceiling on mortgage interest, charitable gifts, or state taxes. Instead, it used adjusted gross income, or AGI, to calculate an overall reduction in certain itemized deductions. That unusual design is why tax experts often described Pease as a hidden surtax rather than a genuine deduction limit.

The original Pease limitation was suspended by the Tax Cuts and Jobs Act for tax years 2018 through 2025. A 2025 tax law then permanently retired the old formula and replaced it, beginning in 2026, with a different limitation for taxpayers in the 37% federal income tax bracket. In other words, Pease is gone, but Congress did not exactly throw open the deduction buffet and walk away.

What Was the Pease Limitation?

The Pease limitation was an income-based reduction in otherwise allowable itemized deductions. Congress enacted it as part of the Omnibus Budget Reconciliation Act of 1990, and it generally took effect for taxable years beginning after December 31, 1990. The provision was named after Representative Donald Pease, who advocated limiting deductions for taxpayers with relatively high incomes.

Under the original law, the limitation began when AGI exceeded $100,000, or $50,000 for a married taxpayer filing separately. Those amounts were indexed for inflation after 1991. Congress initially scheduled the provision to expire after 1995, but the Omnibus Budget Reconciliation Act of 1993 removed that expiration date and effectively made the rule permanent at the time.

The rule later experienced several legislative disappearances and comebacks. The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually reduced the limitation during 2006 through 2009 and eliminated it for 2010. Subsequent legislation kept it out of action through 2012. The American Taxpayer Relief Act of 2012 then restored Pease beginning in 2013, with higher income thresholds that were adjusted annually for inflation.

How Did the Pease Limitation Work?

Before 2018, a taxpayer whose AGI exceeded the applicable filing-status threshold generally had to reduce affected itemized deductions by the lesser of two amounts:

1. Three percent of the amount by which AGI exceeded the applicable threshold; or
2. Eighty percent of the itemized deductions subject to the limitation.

The word lesser mattered. The first calculation usually determined the reduction, while the second prevented the rule from eliminating more than 80% of the affected deductions. At least 20% remained available, assuming those deductions had survived every other applicable restriction in the tax code.

The 3% Rule Was Based on Excess Income

One of the most common misunderstandings was that Pease reduced deductions by 3%. That was not quite correct. It generally reduced deductions by an amount equal to 3% of the taxpayer’s AGI above the threshold.

Suppose a threshold was $300,000 and a taxpayer had AGI of $400,000. The excess AGI was $100,000, so the preliminary Pease reduction was $3,000. The taxpayer’s deductions did not matter for that first calculation except when applying the 80% ceiling.

This income-driven structure produced some odd results. Two taxpayers with the same AGI could face the same preliminary reduction even if one had modest itemized deductions and the other had given a small art museum to charity. The amount of income above the threshold turned the dial; the type and amount of deductions mainly determined whether the 80% cap stopped it.

Not Every Itemized Deduction Was Included

The Pease limitation did not apply to certain protected categories. Under the pre-2018 rules, excluded deductions generally included medical and dental expenses, investment interest, casualty and theft losses, and wagering losses. Other deductions, such as charitable contributions, mortgage interest, state and local taxes, and many miscellaneous itemized deductions, could be included in the Pease calculation after their own individual limitations had been applied.

This sequencing made tax returns more complicated. A taxpayer might first apply the AGI floor for medical expenses, a percentage limit for charitable contributions, a ceiling on another expense, and then the Pease limitation to what remained. Tax law occasionally enjoys stacking limitations the way a diner stacks pancakesexcept the syrup is additional paperwork.

A Simplified Pease Limitation Example

Consider a married couple filing jointly in 2017, the final year before the Tax Cuts and Jobs Act suspension. Their facts are simplified as follows:

• Adjusted gross income: $500,000
• 2017 Pease threshold for joint filers: $313,800
• Itemized deductions subject to Pease: $80,000
• Itemized deductions excluded from Pease: $20,000

First, subtract the threshold from AGI:

$500,000 − $313,800 = $186,200

Next, multiply the excess by 3%:

$186,200 × 3% = $5,586

The alternative limit would be 80% of the $80,000 in affected deductions, or $64,000. Because $5,586 is less than $64,000, the couple’s deduction reduction would be $5,586.

Instead of claiming the full $100,000 in itemized deductions, they would generally claim $94,414. At a 39.6% marginal rate, that $5,586 reduction could increase federal income tax by approximately $2,212, ignoring the alternative minimum tax and other interactions. The 2017 filing thresholds and the 3%/80% calculation were specified under the pre-TCJA rules.

Why Pease Behaved Like a Surtax

Although Pease was officially a limitation on deductions, its economic effect often resembled an additional marginal income tax. Once a taxpayer crossed the threshold, earning another dollar could reduce itemized deductions by three cents. Those three cents returned to taxable income and were taxed at the taxpayer’s marginal rate.

For someone in the former 39.6% top bracket, the calculation looked like this:

3% × 39.6% = 1.188%

Thus, Pease could add roughly 1.19 percentage points to the taxpayer’s effective marginal federal income tax rate while the 3% formula applied. A statutory rate of 39.6% could behave more like 40.8% before considering payroll taxes, investment-income taxes, state taxes, or other phaseouts. Congressional and tax-policy analyses repeatedly observed that Pease functioned more like an income surtax than a direct limit tied to a particular deduction.

That design also weakened the connection between a taxpayer’s behavior and the deduction being reduced. A year-end bonus, a large capital gain, or a business-income increase could erase part of a charitable or mortgage-interest deduction even when the deductible expense itself had not changed.

Who Was Most Affected?

Pease applied only to taxpayers who both itemized and had AGI above the relevant threshold. Lower- and middle-income taxpayers were generally unaffected, as were high-income taxpayers who claimed the standard deduction instead of itemizing.

By 2017, the thresholds had risen to $261,500 for single filers, $287,650 for heads of household, $313,800 for married couples filing jointly, and $156,900 for married taxpayers filing separately. The thresholds were indexed for inflation, helping prevent ordinary inflation from automatically pushing more households into the limitation.

The effect was highly concentrated at the top of the income distribution. Congressional Research Service analysis found that Pease reduced deductions for 97% of taxpayers with income of at least $10 million in 2017. Among affected taxpayers in that income range, the average reduction exceeded $835,000.

Those figures help explain the political disagreement surrounding the rule. Supporters viewed Pease as a way to recover revenue from taxpayers who received large benefits from itemized deductions. Critics saw it as an indirect tax-rate increase that made the code less transparent and added calculations without directly reforming the deductions policymakers considered too generous.

Why Was the Pease Limitation Repealed?

1. It Added Complexity

Pease required an additional calculation after taxpayers had already determined their individual deductions and applied other limits. Historical congressional analysis identified simplification as a principal argument for phasing out the provision. Removing it eliminated a separate worksheet and made it easier to understand how an itemized deduction affected taxable income.

Admittedly, “simpler” is a relative term in federal taxation. Removing one worksheet does not transform Form 1040 into a beach novel. Still, one fewer overlapping limitation is one fewer opportunity for taxpayers and preparers to reach for headache medicine.

2. Pease Disguised an Increase in Marginal Tax Rates

Lawmakers could have raised the top statutory tax rate directly. Instead, Pease raised revenue by reducing deductions as income increased. Critics argued that this obscured the true marginal tax burden and made tax-rate comparisons less meaningful.

A taxpayer might believe the top rate was 39.6%, yet the deduction phaseout could make the next dollar of income subject to a higher effective rate. Policy analysts therefore called Pease a surtax wearing a deduction-limit costume.

3. It Was Poorly Matched to Individual Deductions

If Congress believed the mortgage-interest deduction was too large, it could limit qualifying mortgage debt. If lawmakers wanted to restrict state and local tax deductions, they could impose a SALT cap. Pease instead reduced a pool of deductions according to income, regardless of which affected deduction created the pool.

This broad approach made it difficult for taxpayers to know which tax preference Congress was actually targeting. It also meant that a person’s charitable deduction could effectively shrink because of unrelated income from a stock sale or business transaction.

4. The 2017 Tax Law Used Other Restrictions

The Tax Cuts and Jobs Act nearly doubled the standard deduction, capped the state and local tax deduction, reduced the mortgage-debt limit for new loans, suspended miscellaneous itemized deductions, and restricted personal casualty-loss deductions. With those targeted changes already reducing itemization, Congress suspended the broader Pease overlay for 2018 through 2025.

The combined changes dramatically reduced the number of itemizers. The Tax Policy Center reports that about 31% of individual returns included itemized deductions in 2017, compared with approximately 8% in 2022.

Technically, the 2017 law did not permanently repeal Pease. It added a rule preventing Section 68 from applying during tax years 2018 through 2025. Had Congress done nothing further, the old limitation was scheduled to return in 2026 along with several other expiring individual provisions.

5. Repeal Still Involved a Revenue Tradeoff

Removing Pease lowered taxes primarily for higher-income itemizers and reduced federal revenue. Earlier congressional analysis noted that the provision had originally been adopted to raise revenue without explicitly increasing statutory marginal rates. Repealing it therefore simplified the tax system but also shifted the distribution of the tax burden toward taxpayers who did not benefit from the repeal.

That tradeoff never disappeared. The debate was not simply “complex rule bad, repeal good.” It was a choice among simplicity, transparency, revenue needs, and the desired progressivity of the federal income tax.

What Replaced the Pease Limitation?

Legislation enacted on July 4, 2025, permanently rewrote Internal Revenue Code Section 68. Effective for taxable years beginning after December 31, 2025, the classic Pease formula3% of excess AGI, capped at 80% of affected deductionsno longer applies.

The replacement rule applies to taxpayers whose income reaches the 37% tax bracket. It reduces otherwise allowable itemized deductions by two thirty-sevenths of the lesser of:

1. Total itemized deductions after other applicable limits; or
2. The amount by which income, calculated under the statutory formula, exceeds the starting point of the 37% bracket.

Two thirty-sevenths equals approximately 5.4%. Economically, the rule generally limits the federal tax benefit of deductions attributable to income in the 37% bracket to 35 cents per deducted dollar rather than 37 cents. It is triggered by taxable-income concepts tied to the top bracket, not by the old inflation-adjusted AGI thresholds used under Pease.

For 2026, the IRS lists relevant thresholds of $768,700 for married couples filing jointly and qualifying surviving spouses, $640,600 for single and head-of-household filers, and $384,350 for married taxpayers filing separately. The calculation applies after other deduction floors and restrictions.

Calling this new provision “Pease 2.0” may be convenient, but it is technically misleading. Both rules reduce itemized deductions for high-income taxpayers, yet they use different thresholds, different formulas, and different policy structures. The old Pease limitation is repealed. A new overall limitation now occupies the same section of the tax code.

Practical Experiences and Lessons From the Pease Era

The most valuable practical lesson from Pease is that a tax provision’s nickname may not describe what it actually does. “Limitation on itemized deductions” sounds as though the deduction itself triggers the rule. In practice, income was the principal trigger. Taxpayers who focused only on how much they donated, paid in mortgage interest, or remitted in state taxes could miss the real source of the reduction: AGI above the threshold.

A common planning experience involved an executive, business owner, or investor whose income changed sharply near year-end. Imagine a taxpayer expecting AGI just below the Pease threshold. A large bonus, Roth conversion, business distribution, or recognized capital gain could move AGI above the line. The new income created its own tax, but it also reduced existing deductions. The surprise was not usually enormous relative to the transaction, but it was irritatingthe fiscal equivalent of finding an extra service fee after booking a flight.

Another frequent mistake was describing Pease as a 3% reduction in itemized deductions. That wording could produce wildly inaccurate estimates. A taxpayer with $200,000 in deductions did not automatically lose $6,000. The calculation began with 3% of excess AGI, not 3% of deductions. Conversely, a taxpayer with relatively modest affected deductions could eventually encounter the 80% ceiling if income rose far enough.

Tax preparers also had to distinguish protected deductions from deductions included in the limitation. Medical expenses, investment interest, casualty and theft losses, and wagering losses generally received different treatment. Software usually handled the arithmetic, but understanding the categories remained essential when explaining why a client’s Schedule A total did not match the final deduction shown on the return.

Charitable planning provided another important lesson. Some donors assumed that making a larger contribution would “beat” Pease. Because the primary formula was based on excess AGI, adding another affected deduction did not necessarily reduce the Pease haircut. The larger contribution could still provide a deduction, but the income-based reduction might remain exactly the same unless the 80% ceiling had been controlling.

The alternative minimum tax created an additional layer of confusion. A taxpayer might lose the benefit of state and local tax deductions under the AMT before the regular-tax Pease limitation became the decisive issue. That meant the same Schedule A expense could encounter multiple checkpoints, and the rule producing the final tax increase was not always obvious from a quick glance at the return.

For modern taxpayers, the historical experience remains relevant even though the old formula is gone. The replacement Section 68 limitation still demonstrates why high-income tax planning cannot rely on a deduction’s face value. A $10,000 deduction does not necessarily save $3,700 simply because the taxpayer’s highest marginal rate is 37%. Other floors, caps, phaseouts, charitable-contribution rules, the alternative minimum tax, and the new overall limitation may change the result.

The practical approach is to model the entire return rather than multiply a proposed deduction by a headline tax rate. This is especially important when income may cross the top-bracket threshold or when a taxpayer is considering a large charitable gift, asset sale, bonus deferral, or other transaction that can move income between tax years.

Finally, the Pease story shows why readers should be cautious with the word repealed. The 2017 legislation temporarily suspended the rule. The 2025 legislation permanently removed the classic formula but simultaneously created a different limit. In tax policy, a rule can leave through the front door while its distant cousin quietly moves into the spare bedroom.

Conclusion

The Pease limitation reduced certain itemized deductions for high-income taxpayers by the lesser of 3% of AGI above an applicable threshold or 80% of the affected deductions. Because the reduction increased with income rather than directly with deductible expenses, it operated much like an additional marginal income tax.

Congress repeatedly modified, suspended, and restored Pease before the Tax Cuts and Jobs Act turned it off for 2018 through 2025. The old rule was criticized for adding complexity, obscuring effective tax rates, and applying a broad income-based haircut instead of directly reforming individual deductions.

The classic Pease limitation is now permanently gone. Beginning in 2026, however, taxpayers in the highest federal bracket face a new Section 68 rule that generally caps the tax value of affected itemized deductions at 35% rather than 37%. Pease may have retired, but the federal government has not lost interest in limiting deductions at the top of the income scale.

Note: This article is for general educational purposes, reflects federal tax law available through July 14, 2026, and is not individualized tax or legal advice.