Itemized Deduction Limitations: A High-Level Overview
Video and a streamlined guide
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Video
Discussion
This is the first in a series of videos covering recent tax law updates. Today, we’re going to start—somewhat backwards—by looking at certain income tax changes.
This serves as a good aggregator for many of the other new updates under the One Big Beautiful Bill Act (“OBBBA”), so we’ll begin with the itemized deduction limitations under Code Section 68.
Disclaimer
This presentation is for educational purposes only and is not legal or tax advice. It is intended for wealth transfer professionals. I often receive comments along the lines of, “This wasn’t useful for my personal tax return.” That’s because I am not producing do-it-yourself guidance for taxpayers. My goal is to help educate professionals. For personal tax matters, please consult your CPA or other qualified advisor.
General Change – Effective 2026
Starting in 2026, individuals, estates, and non-grantor trusts will not be able to fully deduct all of their itemized deductions.
Section 68 has essentially been rewritten. The prior Pease limitation on itemized deductions, which has been suspended since the Tax Cuts and Jobs Act (TCJA), is being replaced with a new limitation structure.
Many individual deductions (some old, some updated) have their own specific limitations, which apply before the new Section 68 limitation. For example:
State and Local Tax Deduction (SALT) – Previously capped at $10,000 under TCJA, now increased to as much as $40,000, with a phase-down starting once income exceeds $500,000.
Charitable Deduction Floor – A new minimum giving requirement of 0.5% of AGI must be met before deductions can be claimed.
After these specific reductions, the Section 68 limitation is applied to the tentative itemized deductions.
How the Limitation Works
The limitation is 2/37 of the lesser of:
Tentative itemized deductions (after specific reductions, but before the Section 68 limitation); or
Tentative taxable income (increased by the itemized deductions) in excess of the threshold where the 37% tax bracket begins.
This “tentative taxable income” is not AGI. Certain deductions available to non-itemizers (such as QBI deductions) are still subtracted after AGI, before arriving at this figure. These other “deductions” can be found in IRC Section 63(b).
Thresholds for 2025
(Exact inflation adjustments for 2026 are not yet known; numbers in the examples below are illustrative)
Joint filers: 37% bracket starts at $751,600
Single filers: $626,350
Estates and trusts: $15,650
Key Change for Estates & Trusts
Under current law (suspended in application to individuals by TCJA), Code Section 68(e) explicitly excludes estates and trusts from the Pease limitation. Under OBBBA, that exclusion is gone. A Senate Finance Committee summary confirms that this was intentional - estates and trusts will now be subject to this limitation.
Example 1 – Joint Filers (Illustrative)
Assume in 2026, the 37% bracket for joint filers starts at $775,000.
Jack and Jill have:
Tentative taxable income: $1,050,000 (after all non-itemizer deductions)
Tentative itemized deductions: $75,000
Step 1: Excess over 37% bracket threshold = $1,050,000 – $775,000 = $275,000
Step 2: Lesser of $275,000 or $75,000 = $75,000
Step 3: Limitation = (2/37) × $75,000 = $4,054
Step 4: Allowable itemized deductions = $75,000 – $4,054 = $70,946
Result: Taxable income increases from $975,000 to $979,054 due to the limitation.
Example 2 – Estate (Illustrative)
Assume in 2026, the 37% bracket for estates and trusts starts at $16,400.
Jack dies in 2026 with:
$1 million IRA payable to his estate, for which his estate takes an immediate lump-sum distribution without waiting for 5 years (assume no state income, or death/inheritance, taxes)
$400,000 federal estate tax attributable to the IRA (deductible under Section 691(c))
With no other deductions (aside from the $600 personal exemption for estates), the estate’s tentative taxable income (with itemized deductions added back) exceeds the 37% bracket threshold by $983,000.
Step 1: Tentative itemized deductions = $400,000
Step 2: Lesser of $983,000 or $400,000 = $400,000
Step 3: Limitation = (2/37) × $400,000 = $21,622
Step 4: Allowable itemized deductions = $400,000 – $21,622 = $378,378
Result: Taxable income = $621,022.
Special Considerations
Deductions available to all taxpayers (Section 63(b)) are subtracted before calculating the limitation. Examples include:
For estates and trusts only, the personal exemption under IRC Section 642(b) (standardized deductions are not available to estates and trusts)
QBI deduction under Section 199A (now permanent under OBBBA)
Certain new deductions for tips, overtime, and passenger vehicle loan interest created under OBBBA
Charitable deduction for non-itemizers under Section 170(p) (increased to $1,000 / $2,000 joint in 2026)
Grantor trusts – Only the portion of a trust that is non-grantor is subject to this calculation.
Charitable deductions for estates and trusts (Section 642(c)) – Still unclear whether these will be treated as itemized deductions for purposes of the limitation.
For more in-depth analysis and updates, visit my newsletter at griffinbridgers.substack.com. While I can’t answer individual questions, I’m always happy to be a resource for wealth transfer professionals seeking clarity on the new law.
Thank you for watching—I look forward to sharing more on OBBBA and other planning topics in future videos.