It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, you won’t want to miss it.
P Is For Pease Limitations
High-income taxpayers who itemize their deductions on a Schedule A, Itemized Deductions (downloads as a PDF) should be aware of Pease limitations. Pease limitations are named after former Rep. Don Pease (D-OH) and cap or phase out some itemized deductions once adjusted gross income (AGI) reaches certain dollar amounts.
What the Pease limitations do, effectively, is reduce the total amount of deductions you can claim on your return. If the Pease limitations apply, the total of all your itemized deductions is reduced by the lesser of:
- 3% of AGI above the applicable threshold; or
- 80% of the amount of itemized deductions otherwise allowable for the tax year.
Here’s the math:
Let’s say you are a single taxpayer with an adjust AGI of $400,000 and your affected itemized deductions total $50,000. The Pease limitations reduce your deductions at a rate of 3% – or 3 cents for each dollar – over the threshold. Since the overage is $141,750 ($400,000 AGI – $258,250 Pease threshold), your allowable deductions are reduced by $4,252.50 resulting in an allowable deduction of $45,747.50. At a marginal rate of 33%, you can see that the loss of deduction costs you about $1,400. As income and tax rates go up, the loss of the deduction hits your wallet more. (*This doesn’t take into account other limitations on deductions, such as the Alternative Minimum Tax (AMT).)
Pease limitations apply to charitable donations, the home mortgage interest deduction, state and local tax deductions and miscellaneous itemized deductions. They do not apply to medical expenses, investment expenses, gambling losses and certain theft and casualty losses.
Note: Under the TCJA, there are no Pease limitations for the tax years 2018 through 2025.
For more Taxes A to Z, check out:
- A is for Affordable Care Act Reporting
- B is for Back Pay
- C is for Canceled Debt
- D is for Dependents
- E is for Eligible Rollover Distributions
- F is for Fat Finger Error
- G is for GI Bill
- H is for Harvesting Losses
- I is for Investment Income Expense
- J is for Junk Bonds
- K is for Strike Price
- L is for Late Filing & Late Payment Penalties
- M is for Marginal Tax Rate
- N is for NSF
- O is for Over-The-Counter Medications