How Did the Pease Limitation Work (and Why Was It Repealed?)
The Pease limitation was repealed in 2018, but it could come back in 2026
The Pease limitation used to put a cap on how much certain taxpayers could claim in the way of itemized deductions if their incomes were over certain thresholds. Named for the politician who first introduced the legislation in 1991—Congressman Donald Pease from Ohio—it was repealed on Dec. 22, 2017 when President Donald Trump signed the Tax Cuts and Jobs Act (TCJA).
The Pease limitation was eliminated as of the 2018 tax year but it will return after 2025 if Congress doesn’t intervene when the TCJA expires at that time.
What the Pease Limitation Accomplished
Itemized deductions are a somewhat tricky tax concept when you think about it, and Donald Pease did. You get to deduct certain expenses you’ve paid all year when you itemize, many of them quite necessary, such as mortgage interest, state and local property taxes, and charitable contributions. Of course, the more you earn, the more you can spend on these things, so wealthier taxpayers were getting some pretty significant deductions.
Joe Average can't afford to give any of his money to charity. Mary Moneybags regularly makes qualified donations of $30,000 a year. Joe might spend $2,500 a year on property taxes, while Mary spends $10,000. Mary used to be able to shave $40,000 a year off her taxable income just for these two expenses before Congressman Pease got involved to put a stop to it.
How the Pease Limitation Worked
The Pease limitation didn’t apply to all itemized deductions. Those for medical expenses, investment expenses, and some theft and casualty losses were spared—maybe because many of these deductions had their own separate built-in limitations anyway. But the deductions for home mortgage interest, state and local taxes, charitable contributions, and certain miscellaneous deductions became limited for wealthier taxpayers.
If your adjusted gross income (AGI) was above a certain threshold for your filing status, you had to subtract 3% of the difference from the affected itemized deductions you were claiming. For example, the AGI limit for single taxpayers was $261,500 in 2017. If you were single with an AGI of $281,500, you would have had to subtract $600 from your itemized deductions in these categories: 3% of that additional $20,000 in income works out to $600. If you had $30,000 in itemized deductions, you could only claim $29,400 of them.
The Limitation Cap
A few hundred dollars doesn’t sound like a big deal when you're earning upward of $280,000 a year, but it still represents some lost tax savings. And Congress was kind in one respect. It capped the reduction at 80% overall, but this rule helped only the wealthiest taxpayers.
Your income would have to have been so significant that 3% of the difference between the threshold and your AGI exceeded 80% of the itemized deductions you could otherwise have claimed.
Adjusted Gross Income Thresholds
The Pease limitation AGI thresholds increased somewhat in 2017 from what they were in 2016 because they were indexed for inflation. Even so, they achieved what Congressman Pease intended: Higher-income individuals were affected. The limitations were based on filing status.
- The AGI limit for single taxpayers was $261,500 in 2017, up from $259,400 in 2016.
- The limit for married taxpayers filing jointly increased from $311,300 in 2016 to $313,800 in 2017.
- Heads of household were capped at $287,650 in 2017, up from $285,350 in 2016.
- Those who were married but filed separate returns encountered a limit of $155,650 in 2016, and this increased to $156,900 in 2017.
Other Related Tax Changes
The TCJA resulted in a great many other tax code changes as well, and some of them make the elimination of the Pease limitation redundant, if not moot. For example, many work-related miscellaneous deductions were eliminated under the new tax law anyway. Applying the Pease limitation to them no longer serves any purpose because they don't exist.
The TCJA also now imposes a ceiling of $10,000 on the deduction of property, state, and local taxes. This limit applies to the total of all three when they’re added together. If you pay $20,000 in 2018, that extra $10,000 won’t do you any good at tax time—you can no longer claim it, at least not through 2025 when the TCJA potentially expires. This cap serves a similar purpose to that achieved by the Pease limitation—it limits this deduction for taxpayers who might find themselves paying in excess of $10,000 a year for these taxes.
The mortgage interest deduction has been tweaked downward as well. It's now limited to $750,000 in acquisition debt for mortgages taken out after Dec. 14, 2017. The limit used to be $1 million. Interest on many home equity loans has been eliminated from the equation as well. So again, the Pease limitation would only limit a tax provision that the TCJA affected anyway.
Congress apparently felt that the Pease limitation and these other terms of the TCJA overlapped, serving the same purpose.