What Is Section 68? The Pease Limitation on Deductions

“Section 68” refers to a provision in the U.S. Internal Revenue Code that established a cap on specific itemized deductions for taxpayers with high incomes. This rule is more commonly known as the “Pease limitation,” named after the congressman who introduced it. Its purpose was to increase the tax liability for higher earners. The Tax Cuts and Jobs Act of 2017 (TCJA) suspended this limitation, so it is not currently in effect.

The Mechanics of the Pease Limitation

Before its suspension, the Pease limitation applied to taxpayers whose adjusted gross income (AGI) surpassed certain annual thresholds. These income thresholds were adjusted each year for inflation. For example, in 2017, the last year it was active, the AGI threshold was $261,500 for single individuals and $313,800 for those married filing jointly. If a taxpayer’s AGI was above the applicable amount for their filing status, their total itemized deductions were subject to a reduction.

The limitation applied to the majority of common itemized deductions, including deductions for state and local taxes (SALT), home mortgage interest, and charitable contributions.

Certain deductions were specifically shielded from the Pease limitation’s reach. These exemptions included deductions for medical expenses, investment interest expenses, and losses from casualties or theft. This meant that no matter how high a taxpayer’s income was, the value of these specific deductions would not be reduced by this particular rule.

The calculation for the reduction was based on a “lesser of” two figures rule. The total amount of a taxpayer’s otherwise allowable itemized deductions was decreased by either 3% of their AGI above the annual threshold, or 80% of the total amount of their itemized deductions subject to the limitation. For instance, if a married couple in 2017 had an AGI of $413,800 ($100,000 over the threshold) and $50,000 in affected deductions, the 3% calculation would be $3,000. The 80% calculation would be $40,000, so the lesser figure of $3,000 would be the reduction amount.

Impact of the TCJA Suspension

The Tax Cuts and Jobs Act of 2017 suspended the Pease limitation for tax years 2018 through 2025. This suspension meant that high-income taxpayers could take their full itemized deductions without this specific overall cap.

This change was part of a broader restructuring of the deduction system. The same legislation nearly doubled the standard deduction, which incentivized many taxpayers to stop itemizing. For those who continued to itemize, the TCJA introduced a new limitation in the form of a $10,000 annual cap on the deduction for state and local taxes (SALT).

While the elimination of the Pease limitation was a benefit to high-income individuals, the new $10,000 SALT cap often had a greater restrictive impact. This was particularly true for taxpayers in areas with high state income and property taxes. The tax benefit of the Pease suspension was not always fully realized because of this new, more direct cap on a major deduction.

Preparing for the Limitation’s Scheduled Return

Under current law, the suspension of the Pease limitation is not permanent. The provision is set to expire at the end of 2025, meaning the limitation as it existed before will be reinstated for the 2026 tax year and beyond.

The return of this limitation will coincide with the expiration of several other TCJA provisions. The higher standard deduction amounts are scheduled to revert to their lower, pre-TCJA levels, and the $10,000 cap on state and local tax deductions is also set to disappear. This creates a different future tax landscape for high-income taxpayers, who will once again face a reduction in their total itemized deductions based on their AGI.

For individuals who anticipate being affected, tax planning can help manage liability in the years ahead. This could involve controlling AGI levels in years when the limitation is active. Another potential strategy is timing certain discretionary deductible expenses, such as making large charitable contributions in years before the limitation returns to maximize their value.