Limitation on Itemized Deductions (Pease)

The Limitation on Itemized Deductions (known as Pease after the congressman who helped create it) reduces most itemized deductions by 3 percent of the amount by which AGI exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions. However, the 2001 tax act eliminated the limitation for 2010; as a result, all taxpayers get the full value of their itemized deductions in that year.

• The 2001 tax act reduced Pease by 1/3 in 2006 and 2007 and by 2/3 in 2008 and 2009 before repealing it entirely for 2010. Unless the reduction or repeal is extended, Pease will return in 2011 at its permanent level.
• 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).
• Because itemized deductions tend to increase with income, disallowed deductions are almost always less than 80 percent of total deductions. Pease is effectively just an income tax surcharge, equal to 3 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 threshold is half as much for married couples filing separately.)

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.

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.

Values for 2009 tax year

Values for 2008 tax year

Individual Income Tax Parameters (Including Brackets), 1945-2010