The Pease limitation put a cap on how much certain taxpayers could claim in the way of itemized deductions before it was repealed when President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) into law on December 22, 2017. Taxpayers with adjusted gross incomes (AGIs) over certain thresholds were limited as to what they could claim.
Named for Congressman Donald Pease from Ohio, the politician who first introduced the legislation in 1991, the Pease limitation was first repealed from 2010 through 2012 before the American Taxpayer and Relief Act of 2012 reinstated it. Then it was repealed yet again by the TCJA.
The Pease limitation was eliminated as of the 2018 tax year, but it could potentially return 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 can deduct certain expenses that you’ve paid all year from your taxable income when you itemize. Many of these expenses are quite necessary, things you'd have to pay even if you couldn't claim a deduction for them, such as mortgage interest, and state and local property taxes.
The more you earn, the more you can spend on these deductible expenses, so wealthier taxpayers were getting some pretty significant tax breaks before the Pease legislation intervened.
As an example, let's say that Joe Average can't afford to give any of his money to charity. He's just struggling to get by. But Mary Moneybags regularly makes qualified donations of $30,000 a year. Mary can subtract a healthy portion of that from her taxable income, whereas Joe doesn't get this tax break.
Joe might spend $2,500 a year on property taxes, while Mary spends $10,000. Mary used to be able to shave another $10,000 a year off her taxable income while Joe could only claim a $2,500 deduction because he can't afford a fancy home like Mary's. These unfair circumstances existed until Congressman Pease got involved to put a stop to it and Pease limitations were implemented.
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 mortgage interest, state and local taxes, charitable contributions, and certain miscellaneous deductions became more limited for wealthier taxpayers under Pease limitation rules.
The Pease legislation required that you would have to subtract 3% from the affected itemized deductions you were claiming if your AGI was above a certain threshold for your filing status. The 3% applied to the difference between your AGI and this threshold.
The AGI limit for single taxpayers was $261,500 in 2017, the last year the Pease limitation was in place. You would have had to subtract $600 from your itemized deductions in these categories if you were single with an AGI of $281,500, because 3% of that additional $20,000 in income works out to $600. You could only claim $29,400 if you had $30,000 in itemized deductions.
The Limitation Cap
A few hundred dollars might not 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 really only helped 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, but this increased to $156,900 in 2017.
These calculations are based on your adjusted gross income, not your total income. Your AGI is what remains after you take certain adjustments to income on the first page of the 2017 Form 1040. A whole new 1040 went into effect in the 2018 tax year, and another new 1040 was introduced in 2019. Your AGI appears on line 37 on the first page of the 2017 version.
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 almost redundant. For example, many work-related miscellaneous deductions were eliminated under tax reform anyway. Applying the Pease limitation to them no longer serves any purpose because they don't exist.
- The TCJA also 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.
The TCJA limits the state and local tax deduction for taxpayers who might find themselves paying in excess of $10,000 a year for these taxes. They can no longer claim the balance, with or without the Pease limitation.
- The mortgage interest deduction has been tweaked downward as well. It's 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.
NOTE: Tax laws change periodically. You should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.