The Section 68 Itemized Deduction Limitation for Top-Bracket Clients After the 2025 Legislation

Section 70111 of Public Law 119-21 rewrote section 68 of the Internal Revenue Code. For taxable years beginning after December 31, 2025, an individual whose income reaches the 37 percent bracket has itemized deductions reduced by a formula that caps the tax value of each deducted dollar at about 35 cents. The limitation is new for 2026 returns, and it changes the math on charitable gifts, state and local taxes, mortgage interest and other itemized deductions for the firm's highest-income clients.

What does the new section 68 say?

The rewritten section 68(a) provides that, for an individual, itemized deductions otherwise allowable (determined without regard to section 68) are reduced by 2/37 of the lesser of:

1. The amount of those itemized deductions, or
2. The taxpayer's taxable income (determined without regard to section 68 and increased by those itemized deductions) that exceeds the dollar amount at which the 37 percent rate bracket begins for the taxpayer.

Section 68(b) says the limitation is applied after any other limitation on an itemized deduction. Section 70111 also amended section 199A so that taxable income for the qualified business income deduction is computed without regard to section 68.

IRS Publication 505 for 2026 describes the same rule as a reduction of 5.4 percent of the lesser amount. The statute uses the fraction 2/37, which is about 5.405 percent. Use the fraction in a workpaper so the result ties to the return.

Why is it described as a 35 percent cap?

A deduction worth 37 cents per dollar, reduced by 2/37 of that dollar, is worth 37 percent times 35/37, which is 35 cents. For a client whose entire itemized amount sits within the 37 percent bracket, the limitation costs exactly 2 percent of itemized deductions in tax. For a client only partly in the bracket, the cost is smaller, because the reduction is based on the lesser of the deductions or the income in the top bracket.

What are the 2026 thresholds?

The limitation starts where the 37 percent bracket starts. Revenue Procedure 2025-32 sets the 2026 brackets, and the 37 percent rate begins at taxable income over:

Publication 505 lists the same amounts for the section 68 limitation. The thresholds will move each year with the bracket inflation adjustment.

Worked examples for 2026

A joint filer fully in the top bracket

A married couple has $100,000 of itemized deductions after all other limits and $900,000 of taxable income before section 68.

• Taxable income increased by itemized deductions: $900,000 plus $100,000 = $1,000,000.
• Excess over $768,700: $231,300.
• Lesser of $100,000 or $231,300: $100,000.
• Reduction: 2/37 of $100,000 = $5,405.41.
• Allowed itemized deductions: $94,594.59.
• Added tax at 37 percent: about $2,000, or 2 percent of the deductions.

A joint filer just into the top bracket

Same couple, but taxable income before section 68 is $740,000 and itemized deductions are $60,000.

• Taxable income increased by itemized deductions: $800,000.
• Excess over $768,700: $31,300.
• Lesser of $60,000 or $31,300: $31,300.
• Reduction: 2/37 of $31,300 = $1,691.89.

The reduction is smaller because only $31,300 of income, measured before itemized deductions, falls in the 37 percent bracket. The limitation can apply even though taxable income after deductions is below the bracket threshold.

How does section 68 interact with the other 2026 limits?

Because section 68 applies after every other limitation, the order on a 2026 return is:

1. SALT cap. Apply section 164(b)(6) and (7), including the income phase-down. Most clients who reach the 37 percent bracket have MAGI above the point where the cap falls to its $10,000 floor. See the SALT cap after the 2025 legislation.
2. Charitable limits. Apply the 0.5 percent floor and the percentage limits under section 170. See charitable deduction changes for 2026.
3. Other itemized deduction limits. For example, the medical expense floor and the mortgage interest limits.
4. Section 68. Apply the 2/37 reduction to the total.

Deductions taken above the line, or at the entity level, are outside section 68. An entity-level state tax paid by a partnership or S corporation reduces the owner's share of income rather than appearing on Schedule A. See state PTET elections.

Does it affect the QBI deduction?

Not directly. Section 70111 amended section 199A(e)(1) so that taxable income for section 199A purposes is computed without regard to section 68. The QBI deduction itself is not an itemized deduction. See the QBI deduction after the 2025 legislation.

Planning points for top-bracket clients

• Charitable timing. A gift deducted in 2026 or later by a 37 percent bracket client saves about 35 cents per dollar, after the 0.5 percent floor. A gift made by a C corporation the client owns follows the corporate charitable rules instead, so model who makes the gift.
• Bunching. Concentrating itemized deductions in one year does not avoid section 68 if the client is in the top bracket in that year. It can still help when the client alternates between itemizing and the standard deduction.
• Years below the bracket. A client with income that crosses the 37 percent threshold in some years and not others, such as a business owner with a sale year, can time discretionary deductions into a year below the threshold.
• Above-the-line alternatives. Retirement plan contributions, business expenses properly deducted on Schedule C or E, and entity-level state taxes reduce income without passing through section 68.
• Estimated payments. The limitation increases tax for 2026 compared with a 2025 computation of the same facts. Update projections and safe harbor amounts. See estimated tax payments.

Review checklist for 2026 returns

1. Confirm whether taxable income plus itemized deductions exceeds the 37 percent bracket threshold for the filing status.
2. Confirm that all other limits were applied before section 68, including the SALT cap and the charitable floor.
3. Recompute the reduction using 2/37 and the lesser-of test.
4. Check that the QBI deduction computation ignores section 68.
5. Check that the client's projection for 2027 uses the new limitation, not 2025 rules.
6. Note the result in the client letter, since clients often expect the full 37 percent benefit from a large gift.

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

Sources

• U.S. Government Publishing Office, Public Law 119-21, section 70111: https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm
• IRS, Revenue Procedure 2025-32: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
• IRS, Publication 505 (2026), Tax Withholding and Estimated Tax: https://www.irs.gov/publications/p505

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error