Limitation on Itemized Deductions (Pease)

The Limitation on Itemized Deductions (known as Pease after the congressman who helped create it) reduces most itemized deductions in 2009 by 1 percent of the amount by which AGI exceeds $166,800 ($83,400 for married couples filing separately).

• The reduction does not apply to deductions for medical expenses, investment interest, casualty and theft losses, and gambling losses (which can only offset gambling winnings included in income).
• Pease cannot reduce other itemized deductions by more than 26 2/3 percent in 2009.
• Because itemized deductions tend to increase with income, disallowed deductions are almost always less than 26 2/3 percent of total deductions. Pease is effectively just an income tax surcharge, equal to 1 percent of the taxpayer’s marginal tax rate.
• Pease does not apply under the AMT.
• The threshold for Pease is the same for single filers, heads of household, and married couples filing jointly, which creates significant marriage penalties.
• The 2001 tax act reduces Pease by 1/3 in 2006 and 2007 and 2/3 in 2008 and 2009, and act repeals Pease entirely in 2010. Unless the reduction or repeal is extended, Pease will return in full force in 2011 (3 percent phaseout up to 80 percent of itemized deductions).

Examples

Single filer with no dependents and AGI = $200,000 Income exceeds phaseout start by $33,200 (= $200,000 - $166,800); 3 percent of $33,200 = $996 but the reduction is limited to 1/3 of that amount, or $332.

Married couple with two children and AGI = $275,000 Income exceeds phaseout start by $108,200 (= $275,000 - $166,800); 3 percent of $108,200 = $3,246 but the reduction is limited to 1/3 of that amount, or $1,082.

Values for 2008 tax year

Individual Income Tax Parameters (Including Brackets), 1945-2009