Itemized deduction limitation 2026: the 5.4% cut for the 37% bracket

Itemized deduction limitation 2026: what it does

The itemized deduction limitation 2026 brings is simple in concept: the 2025 tax law trims Schedule A deductions for taxpayers in the top bracket. Without the rule, a $10,000 deduction would save a 37% taxpayer $3,700. With it, the same deduction saves about $3,500. The rule lives in section 68 of the tax code, which used to hold the older Pease limitation.

Most people never meet it. It only applies once taxable income, figured before itemized deductions, crosses the point where the 37% rate starts. For everyone below that line, itemized deductions work exactly as before.

Who the itemized deductions 2026 limit affects

The thresholds match the start of the 37% bracket for each filing status. Because brackets are indexed for inflation, these numbers change every year.

Two details decide whether you cross the threshold. First, the income test uses taxable income increased by your itemized deductions, which is roughly AGI minus any qualified business income deduction and any Schedule 1-A deductions. Second, the 2027 thresholds are not yet announced; they will follow the 2027 brackets, which the IRS usually publishes in October or November. See when 2027 tax brackets are released.

How the 5.4% reduction is figured, step by step

The IRS walks through it on Worksheet 2-6 of Publication 505 (2026), used for estimated tax. The same logic will apply on the 2026 return:

1. Figure each itemized deduction after its own limits: the SALT cap, the 7.5% medical floor, the 0.5% charitable floor and the mortgage debt limit.
2. Add them up. This is your total itemized deductions.
3. Figure taxable income before itemized deductions: AGI minus the QBI deduction and any Schedule 1-A deductions.
4. Subtract your threshold ($768,700 joint, $640,600 single or head of household, $384,350 separate). If the result is zero or less, stop; no reduction applies.
5. Take the smaller of step 2 or step 4.
6. Multiply by 5.4%. Subtract that from total itemized deductions.

The statute states the rate as 2/37, which is 5.405%. Publication 505 rounds it to 5.4% for the worksheet; final 2026 return instructions will show which figure software must use.

Worked examples

Joint filers well above the threshold

A married couple has AGI of $1,000,000 and no QBI or Schedule 1-A deductions. At that income their SALT deduction has shrunk to the $10,000 floor. They paid $30,000 of mortgage interest and gave $50,000 in cash to charity.

Allowed itemized deductions are $80,410, and taxable income is $919,590. At 37%, the full $85,000 would have saved $31,450; the allowed $80,410 saves about $29,752. That is 35 cents per dollar of original deductions, which is the design of the rule.

Single filer just over the line

A single filer has taxable income before itemized deductions of $660,000 and $50,000 of itemized deductions. Income over the $640,600 threshold is $19,400, which is smaller than $50,000. The reduction is 5.4% of $19,400, or $1,047.60, leaving $48,952.40 of itemized deductions. Near the threshold the cut is small because only the income inside the 37% band is used.

Interaction with the SALT cap and charity rules

The 5.4% cut comes last. Publication 505 says it is applied after every other limit on itemized deductions, so high earners face several layers at once:

• The SALT cap of $40,400 shrinks once modified AGI passes $505,000 and bottoms out at $10,000; see our SALT deduction cap page.
• Charitable gifts lose the first 0.5% of AGI, then face the 60% or lower ceilings described in charitable deduction limits.
• Medical costs count only above 7.5% of AGI, which at this income level removes most of them; see the medical expense deduction threshold.
• Whatever remains is reduced by 5.4% of the smaller figure.

The limit does not touch the standard deduction, so a top-bracket taxpayer whose Schedule A total ends up close to $32,200 joint should check whether the standard deduction now wins. Our standard deduction amounts guide lists each figure.

Does it affect the QBI deduction? And how it differs from Pease

No. Publication 505 states that the limitation does not apply when figuring the qualified business income deduction. Business owners compute QBI first, and that deduction also lowers the income used in step 3.

The old Pease limitation, suspended from 2018 through 2025, worked differently: it reduced itemized deductions by 3% of AGI above a threshold, up to 80% of deductions, and started at incomes far below the top bracket. The new rule only reaches income taxed at 37%, and its cut can never exceed 5.4% of your deductions. For how the top rate itself is applied, see marginal tax rate explained.