One of the tax reform ideas being batted around in Washington is a curb or repeal of certain itemized deductions.
For example, President Trump has proposed a dollar limit on all itemized deductions of $100,000 for single filers and $200,000 for joint filers. Taking another tack, House Republican leaders have pledged to eliminate most itemized deductions, other than the “sacred cows” of mortgage interest and charitable contributions.
It remains to be seen how this will play out once Congress gets down to business. However, for the time being, taxpayers must still contend with the “Pease rule,” which reduces itemized deductions for high-income individuals. This rule was named after Ohio Congressman Donald Pease who introduced the tax law provision into legislation.
Here’s how it works in a nutshell: Generally, you can use the full amount of your itemized deductions claimed on Schedule A of Form 1040 to offset your annual tax liability. However, under the Pease rule, most itemized deductions are reduced by 3 percent of the amount exceeding an adjusted gross income (AGI) threshold, but not by more than 80 percent overall.
The thresholds for 2016 returns are $259,400 of AGI for single filers and $311,300 for joint filers. For 2017, the thresholds increase to $261,500 and $313,800 of AGI, respectively.
For instance, suppose a taxpayer has an AGI of $200,000 above the annual threshold and claims $50,000 in itemized deductions subject to the Pease rule. As a result, the taxpayer’s itemized deductions must be reduced by $6,000 (3 percent of the $200,000 excess AGI), so he or she can deduct only $44,000 rather than $50,000. Note that the 80 percent limit only affects the upper crust.