OBBBA Notice #5 – Schedule A Adjustments for High Income Earners

By Ben Dolan, CFP®

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My last post outlined the impact of the 0.5%-of-AGI-floor on charitable contributions, which applies to all taxpayers itemizing deductions starting in 2026, regardless of income level. But those in the 37% tax bracket face another adjustment to itemized deductions starting next year.

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Prior to 2017, taxpayers who itemized deductions and fell into certain income ranges (not just those in the highest bracket) were subject to a reduction in the total allowable amount they could deduct. Known as the Pease limitation, the allowable amount of the deduction was reduced by 3% of the amount by which their AGI exceeded an income threshold.

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The Pease limitation was suspended by the Tax Cuts and Jobs Act in 2017, providing greater benefit to those previously subject to this income-based reduction in deduction amount. According to Ben Henry-Moreland writing for Kitces.com, the OBBBA has replaced the Pease limitation with a bracket-based limitation, targeting those reaching 37% federal bracket (with taxable income above $626,350 for single and head of household, or $751,600 for joint filers). Ben notes that the new law is intended to reduce the tax value of itemized deductions for those in the top tax bracket.

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He provided the following details, and an example of how the reduction works:

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The new limitation reduces allowable itemized deductions by 2/37 of the lesser of:

• The taxpayer's total itemized deductions; or
• The amount by which their taxable income plus total itemized deductions exceeds the 37% bracket threshold (before applying the limitation).

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Anna and Bennett are a married couple with $1 million in AGI and $200,000 of itemized deductions, resulting in $800,000 of taxable income. This puts them in the 37% marginal tax bracket.

Under current law, Anna and Bennett can fully deduct their itemized deductions, saving $200,000 × 37% = $74,000 in tax.

Under the new law, however, their itemized deductions would be reduced by 2/37 of the lesser of:

• Their total itemized deductions ($200,000); or
• The amount by which their taxable income ($800,000) plus itemized deductions ($200,000) exceeds the 37% bracket threshold ($751,600), or ($800,000 + $200,000) − $751,600 = $248,400.

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Because $200,000 is the lesser amount, their allowable deductions are reduced by 2/37 × $200,000 = $10,811. Which means their total allowable itemized deductions would equal $200,000 – $10,811 = $189,189.

The tax savings from these deductions under the new law would be $189,189 × 37% = $70,000, equivalent to 35% of their total itemized deductions.‍

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This adjustment may not seem like a lot, but when added to the 0.5%-of-AGI-floor on charitable deductions in 2026, the difference can add up quickly. Consider, also, that those in the 37% bracket will not qualify for the new, higher SALT deduction, which phases out at $600k for those filing single, head of household and married filing jointly.

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Taking these changes into account when planning for taxes in 2025 and 2026 would be wise!