Itemized Deduction Cap for 37% Bracket Explained

The 2/37 limitation in one line: reduction = 2/37 × the lesser of (your itemized deductions) or (taxable income + itemized deductions − the start of the 37% bracket). For 2026 that start is $640,600 single and head of household, $768,700 married filing jointly and $384,350 married filing separately.

Starting with the 2026 tax year, high earners in the 37% bracket lose a slice of their itemized deductions. The new section 68 cuts itemized deductions by 2/37 of the lesser of (1) your total itemized deductions or (2) the amount by which your taxable income, figured with those deductions added back, exceeds the point where the 37% bracket begins. In practice, every dollar of deductions that offsets 37%-bracket income saves about 35 cents instead of 37 cents.

If you are deciding whether to itemize at all, run your numbers through the standard deduction calculator first. This article covers what happens after that decision for taxpayers at the very top of the bracket schedule.

What does the new section 68 actually say?

Section 70111 of Public Law 119-21, the One Big Beautiful Bill Act, rewrote section 68 for tax years beginning after December 31, 2025. The statute reduces itemized deductions by 2/37 of the lesser of:

1. the itemized deductions otherwise allowable, or
2. taxable income (figured without section 68 and increased by those itemized deductions) above the dollar amount where the 37% bracket begins.

Section 68(b) says the reduction applies after every other limitation on itemized deductions. The same law amended section 199A so the qualified business income deduction is computed without regard to section 68.

How Publication 505 describes it

IRS Publication 505 (2026) states the rule as a cut of 5.4% of the lesser of your total itemized deductions or "the amount your taxable income is more than" the threshold. Two small differences from the statute:

• 5.4% is 2/37 rounded. 2 ÷ 37 = 0.054054. On $100,000 of deductions, 5.4% gives $5,400 and 2/37 gives $5,405.41. Your return will follow whatever Form 1040 and Schedule A instructions use; the gap is about $5 per $100,000.
• "Taxable income" means income before itemized deductions. Pub 505's Worksheet 2-6 measures it as AGI minus the QBI deduction minus Schedule 1-A deductions, which is taxable income with the itemized deductions added back. That matches the statute.

Who is affected? The 2026 thresholds

The thresholds are the starting points of the 37% bracket: Rev. Proc. 2025-32 for 2026 and Rev. Proc. 2026-35, released November 5, 2026, for 2027. The rule applies when taxable income plus itemized deductions exceeds the amount for your filing status.

Because section 68 is tied to wherever the 37% bracket begins, the threshold rises automatically with each year's inflation adjustment; Congress did not write a separate dollar amount. For 2027 the head of household threshold is $25 below the single one, as printed in the revenue procedure.

You can be affected even if your final taxable income lands just under the 37% bracket. The test adds your itemized deductions back first. A single filer with $620,000 of taxable income and $60,000 of itemized deductions is measured at $680,000, which is over $640,600.

Why the limit works out to 35 cents per dollar

A deduction that offsets income taxed at 37% normally saves 37 cents. The new rule takes back 2/37 of that deduction, and the clawed-back amount is taxed at 37%:

• Value of $1 of deduction without the rule: $0.37
• Amount added back: 2/37 × $1 = $0.054
• Tax on the add-back: $0.054 × 37% = $0.02
• Net value: $0.37 − $0.02 = $0.35

So the rule effectively taxes top-bracket deductions as if you were in the 35% bracket. A deduction is now worth the same 35 cents whether your top rate is 35% or 37%.

Worked example 1: deductions fully in the 37% zone

A married couple filing jointly has $1,200,000 of AGI in 2026 and no QBI or Schedule 1-A deductions. Their Schedule A shows:

• SALT: $10,000. At $1.2 million of MAGI, the $40,400 cap is reduced by 30% × ($1,200,000 − $505,000) = $208,500, which hits the $10,000 floor.
• Mortgage interest: $30,000
• Charitable gifts: $66,000 − 0.5% × $1,200,000 floor ($6,000) = $60,000
• Total itemized deductions: $100,000

Section 68 calculation:

1. Taxable income before section 68: $1,200,000 − $100,000 = $1,100,000
2. Add back itemized deductions: $1,100,000 + $100,000 = $1,200,000
3. Excess over $768,700: $431,300
4. Lesser of $100,000 or $431,300: $100,000
5. Reduction: 2/37 × $100,000 = $5,405
6. Allowed itemized deductions: $100,000 − $5,405 = $94,595
7. Taxable income: $1,200,000 − $94,595 = $1,105,405

The extra $5,405 of taxable income costs $5,405 × 37% = $2,000. Their $100,000 of deductions now saves $37,000 − $2,000 = $35,000, exactly 35 cents per dollar.

Worked example 2: straddling the 35% and 37% brackets

A single filer has $680,000 of AGI and $60,000 of itemized deductions.

1. Taxable income before section 68: $620,000 (in the 35% bracket)
2. Add back deductions: $680,000
3. Excess over $640,600: $39,400
4. Lesser of $60,000 or $39,400: $39,400
5. Reduction: 2/37 × $39,400 = $2,130
6. Taxable income: $620,000 + $2,130 = $622,130

Here the add-back lands in the 35% bracket, so it costs $2,130 × 35% = $745. The deductions save $21,788 without the rule ($39,400 × 37% + $20,600 × 35%) and $21,043 with it, or about 35.1 cents per dollar. Only the $39,400 that would have offset 37%-bracket income is exposed.

Worked example 3: just under the line

A married couple has $700,000 of taxable income and $50,000 of itemized deductions. Added together that is $750,000, which is below $768,700, so there is no reduction. A $25,000 bonus would change that: $775,000 − $768,700 = $6,300 of excess, for a reduction of 2/37 × $6,300 = $341.

How the limit stacks with the SALT cap and the charitable floor

Section 68 comes last, so every other Schedule A rule applies first:

Most people above the 37% bracket threshold have MAGI far enough above $505,000 that their SALT deduction is back to the $10,000 floor. The 2/37 haircut then trims even that.

The charitable stack is the steepest. A single donor with $1,000,000 of AGI who gives $100,000 in cash loses the first $5,000 to the 0.5% floor. The other $95,000 then saves 35 cents per dollar, or $33,250. That's 33.25% of the gift, compared with 37% under 2025 rules.

Does it affect the QBI deduction or AMT?

QBI. Section 199A now says taxable income for the QBI deduction is computed "without regard to section 68". Your 20% QBI deduction, its taxable-income cap, and the income thresholds for the wage and specified-service limits ($403,500 joint and $201,750 for most others in 2026) are all figured as if the 2/37 cut didn't happen. You don't have to loop the calculation. See the QBI deduction calculator for that piece.

AMT. The alternative minimum tax has its own rules for itemized deductions. It adds back state and local taxes but allows mortgage interest and charitable gifts. Taxpayers at these income levels often have a reduced AMT exemption because the 2026 phaseout starts at $500,000 (single) and $1,000,000 (joint). Run the AMT calculator separately if you also have ISO exercises or private activity bond interest.

What did the OBBBA change compared with the old Pease limit?

The TCJA suspended Pease for 2018 through 2025. Instead of letting it return in 2026, Congress rewrote section 68 with this narrower rule.

Should you still itemize at the top bracket?

Usually yes. The rule trims the benefit by about 5% but doesn't come close to wiping it out. One edge case is worth checking. If your itemized deductions are only slightly above the standard deduction, the 2/37 cut can push them below it. A joint couple with $33,000 of itemized deductions, all inside the 37% zone, would keep $33,000 − 2/37 × $33,000 = $31,216. That is less than the $32,200 standard deduction, so they should take the standard deduction. Compare the reduced itemized figure against your standard deduction, not the raw Schedule A total.

Planning ideas for 37% bracket taxpayers

• Bunching still works, but differently. The haircut means a deduction is worth 35 cents in both 35% and 37% bracket years. Bunching charitable gifts into one year still helps you clear the standard deduction and the 0.5% floor once instead of twice. It doesn't escape the 2/37 cut.
• Fund a donor-advised fund with appreciated stock. The deduction is reduced, but you still avoid capital gains tax (20% plus the 3.8% net investment income tax) on the appreciation. That part of the benefit doesn't go through Schedule A.
• Use qualified charitable distributions if you are 70½ or older. A QCD from an IRA is excluded from income rather than deducted on Schedule A. It skips both the 0.5% floor and the section 68 reduction, and it lowers AGI.
• Keep business and rental interest where it belongs. Mortgage interest on a rental property is a Schedule E expense, not an itemized deduction, so the cut doesn't touch it. Don't move expenses between schedules without a legitimate basis.
• Above-the-line deductions are unaffected. 401(k), HSA, and SEP contributions reduce AGI directly and still save the full 37%.
• Look at split-interest gifts. A charitable remainder trust spreads income over years and yields a partial deduction. Model it with the charitable remainder trust calculator.

Common mistakes

• Testing final taxable income only. The trigger uses taxable income plus itemized deductions, so filers whose returns show 35% bracket income can still be caught.
• Applying 2/37 to all deductions automatically. The base is the smaller of total itemized deductions or the excess over the threshold. Near the line, the excess is the smaller number.
• Reducing the standard deduction or Schedule 1-A deductions. Only Schedule A itemized deductions are cut.
• Applying section 68 before the SALT cap or charitable floor. It comes last.
• Re-running QBI after the cut. QBI is figured without regard to section 68.

Where this fits in the 2026 rules

This rule is one of several 2026 changes for high-income households. The higher SALT cap phases down at the same income levels, the charitable floor is new, and the AMT phaseout now starts lower. The OBBBA tax changes guide covers all of them. The 2026 IRS inflation adjustments guide lists the bracket thresholds, and you can check how the add-back changes your bracket tax with the federal tax bracket calculator.