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 2007 by 2 percent of the amount by which AGI exceeds $156,400 ($78,200 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 53 1/3 percent in 2007.
• The 2001 tax act reduces Pease further in 2008 and 2009 and repeals Pease entirely in 2010. In 2008 and 2009, Pease will reduce itemized deductions by 1 percent of AGI above the thresholds (maximum disallowance equal to 26 2/3 percent of itemized deductions).
• Because itemized deductions tend to increase with income, disallowed deductions are almost always less than 53 1/3 percent of AGI. Pease is effectively just an income tax surcharge, equal to 2 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.
• 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 = $175,000 Income exceeds phaseout start by $18,600 (= $175,000 - $156,400); 3 percent of $18,600 = $558 but the reduction is limited to 2/3 of that amount, or $372.

Married couple with two children and AGI = $250,000 Income exceeds phaseout start by $15,400 (= $250,000 - $234,600); 3 percent of $15,400 = $462 but the reduction is limited to 2/3 of that amount, or $308.

Values for 2008 tax year