The Itemized Deduction Cap Is Back: What IRC §68 Actually Costs a High-Earning Freelancer

Published: September 22, 2026 · Reading time: 11 min

TL;DR: The One Big Beautiful Bill Act revived IRC §68, effective for 2026, reducing itemized deductions by 2/37 of the lesser of the deduction total or the amount your income exceeds your filing status's 37%-bracket threshold ($640,600 single/HoH, $768,700 MFJ, $384,350 MFS for 2026). Unlike the pre-2018 "Pease" limitation it replaces, the new version has no exceptions for medical expenses, investment interest, casualty losses, or gambling losses — every itemized deduction is exposed. In the worked example below, a single freelance consultant with $900,000 of net profit loses $5,060.40 of allowable itemized deductions to the new rule, costing her $1,872.35 in extra federal tax for 2026 — and because her itemized total is the smaller side of the "lesser of" test, every one of those dollars is now worth 35 cents in tax savings instead of 37.

Every existing post in this corpus about high-income planning — the SALT cap increase, the §1202 QSBS exclusion, the QBI deduction — treats itemized deductions as a fixed dollar figure once the SALT cap and other line-item limits are applied. None of them account for the fact that, starting in 2026, a second, separate limitation sits on top of the whole itemized total once your income clears the top bracket. This post fills that gap: what IRC §68 actually says, who it hits, how it differs from the pre-TCJA rule people remember, how it interacts with the QBI deduction through a coordination clause added by the same law, and whether an existing PTET election still avoids it.

What the Statute Actually Says

IRC §68 wasn't new law in 2025 — it dates to 1990, was the "Pease limitation" everyone above a certain income remembers, and the Tax Cuts and Jobs Act's version of the statute switched it off entirely — "this section not applying to any taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2026," per Cornell's own editorial summary of the pre-OBBBA text — for tax years 2018 through 2025. The One Big Beautiful Bill Act (Pub. L. 119-21, title VII, §70111(a), signed July 4, 2025) didn't just let the suspension expire — it rewrote the section entirely for tax years beginning after December 31, 2025. Fetched directly from the current statute:

"(a) In general In the case of an individual, the amount of the itemized deductions otherwise allowable for the taxable year (determined without regard to this section) shall be reduced by 2/37 of the lesser of— (1) such amount of itemized deductions, or (2) so much of the taxable income of the taxpayer for the taxable year (determined without regard to this section and increased by such amount of itemized deductions) as exceeds the dollar amount at which the 37 percent rate bracket under section 1 begins with respect to the taxpayer."

Cornell's own amendment notes trace this directly to the OBBBA rewrite: "Pub. L. 119–21, title VII, § 70111(a), July 4, 2025, 139 Stat. 164," with the effective-date note confirming application to "taxable years beginning after December 31, 2025" — meaning 2026 is the first tax year it actually bites.

Two things are worth sitting with in that single sentence. First, the comparison inside clause (2) isn't your final taxable income — it's your income "increased by such amount of itemized deductions," which is your income before subtracting them. Second, the whole reduction turns on comparing two numbers and taking the smaller one, not on a flat percentage of your itemized total. Both of those have concrete consequences worked through below.

The current version's subsection (b) is short and easy to miss, but it determines the order every other limitation runs in:

"(b) Coordination with other limitations This section shall be applied after the application of any other limitation on the allowance of any itemized deduction."

That means the $40,400 SALT cap (and its MAGI phase-down), the new charitable-contribution floor discussed below, and any other line-item limit are all applied first — §68 takes a second, final pass at whatever survives those.

No More Carve-Outs: What Changed From the Old "Pease" Limitation

Cornell's editorial notes describe what the pre-2025 version of §68 looked like before OBBBA rewrote it: "section consisted of subsecs. (a) to (f) relating, respectively, to general rule, applicable amount, exception for certain itemized deductions, coordination with other limitations, exception for estates and trusts, and this section not applying to any taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2026." That third item — "exception for certain itemized deductions" — was the pre-2018 Pease limitation's subsection (c), and it specifically exempted medical expenses, investment interest, casualty and theft losses, and gambling losses from the reduction.

The rewritten statute has no equivalent subsection. Current §68 runs from (a) straight to (b) — the reduction formula and the coordination rule, full stop. A freelancer (or a CPA working from a decade-old outline) who assumes the old exceptions still apply will overstate their allowable itemized deductions: every category, including a large uninsured casualty loss in a federally declared disaster area, is now subject to the same 2/37 reduction as mortgage interest or state income tax.

Who Actually Clears the Threshold: The 2026 Numbers

Per Rev. Proc. 2025-32, the 37% bracket — and therefore §68 — starts at these figures for 2026:

This is a narrow slice of freelancers — a solo consultant, agency owner, top-producing real estate agent, or entertainer with a genuinely exceptional year. But for that group, §68 is not a marginal rounding error: as the worked example below shows, it applies to the entire itemized deduction, not just the last few thousand dollars of income.

A Full Worked Example: Dana Ferris, Freelance Management Consultant

Dana is single, files Schedule C as a freelance strategy consultant (a business excluded from QBI eligibility as a specified service trade or business under §199A(d)(2), a point that matters later), and lives in a state with real income tax.

Facts for 2026: Net Schedule C profit $900,000. State and local income tax plus the personal-use share of property tax before any cap: well above $40,400. Mortgage interest: $28,000. Cash charitable contributions to public charities: $60,000.

Step 1 — AGI and the Self-Employment Tax Deduction

node -e "
const netProfit = 900000;
const seTaxBase = netProfit * 0.9235;
const ssWageBase2026 = 184500; // 2026 OASDI contribution and benefit base, per SSA's determination published in the Federal Register (90 FR, doc. 2025-19763), up from $176,100 in 2025
const ssPortion = Math.min(seTaxBase, ssWageBase2026) * 0.124;
const medicarePortion = seTaxBase * 0.029;
const seTax = ssPortion + medicarePortion;
const halfSeTax = seTax / 2;
const AGI = netProfit - halfSeTax;
console.log('seTaxBase', seTaxBase.toFixed(2));
console.log('ssPortion', ssPortion.toFixed(2));
console.log('medicarePortion', medicarePortion.toFixed(2));
console.log('seTax', seTax.toFixed(2));
console.log('halfSeTax (deductible)', halfSeTax.toFixed(2));
console.log('AGI', AGI.toFixed(2));
"

seTaxBase 831150.00
ssPortion 22878.00
medicarePortion 24103.35
seTax 46981.35
halfSeTax (deductible) 23490.68
AGI 876509.32

Step 2 — Itemized Deductions, After the SALT Cap and the New Charitable Floor

Dana's AGI is far above the $606,333 MAGI point (established in the corpus's SALT cap guide) where the 2026 SALT cap's phase-down fully bottoms out, so her personal SALT deduction is floored at the pre-OBBBA $10,000 figure regardless of her actual state tax bill. Her charitable contributions face a separate, newer limit: IRC §170(b)(1)(I), added by the same law (Pub. L. 119-21, §70425(a)(1), effective for tax years beginning after December 31, 2025), allows a charitable deduction "only to the extent that the aggregate of such contributions exceeds 0.5 percent of the taxpayer's contribution base" — contribution base being AGI. Both limitations apply before §68 does, per §68(b)'s coordination rule.

node -e "
const AGI = 876509.32;
const salt = 10000; // floored — AGI is well above the ~\$606,333 MAGI point
const mortgageInterest = 28000;
const charitableGiven = 60000;
const floor = 0.005 * AGI;
const charitableAllowed = charitableGiven - floor;
const itemizedFull = salt + mortgageInterest + charitableAllowed;
console.log('0.5% charitable floor (section 170(b)(1)(I))', floor.toFixed(2));
console.log('charitable allowed after floor', charitableAllowed.toFixed(2));
console.log('itemized total before section 68', itemizedFull.toFixed(2));
"

0.5% charitable floor (section 170(b)(1)(I)) 4382.55
charitable allowed after floor 55617.45
itemized total before section 68 93617.45

Step 3 — The §68 Reduction

node -e "
const AGI = 876509.32;
const itemizedFull = 93617.45;
const threshold2026Single = 640600;
const excess = AGI - threshold2026Single;
const boundIsItemized = itemizedFull <= excess;
const reduction = (2/37) * Math.min(itemizedFull, excess);
const itemizedAllowed = itemizedFull - reduction;
console.log('excess over threshold', excess.toFixed(2));
console.log('bound:', boundIsItemized ? 'itemized total (fully saturated)' : 'income excess (partial)');
console.log('section 68 reduction', reduction.toFixed(2));
console.log('itemized deductions allowed after section 68', itemizedAllowed.toFixed(2));
"

excess over threshold 235909.32
bound: itemized total (fully saturated)
section 68 reduction 5060.40
itemized deductions allowed after section 68 88557.05

Dana's itemized total ($93,617.45) is smaller than her income's excess over the threshold ($235,909.32), so the reduction is bound by her itemized total, not her income — every dollar she itemizes is exposed to the full 2/37 haircut. She loses $5,060.40 of allowable itemized deductions to §68.

Step 4 — What the New Cap Actually Costs Dana

node -e "
function tax2026Single(ti) {
  const brackets = [
    [0, 12400, 0.10, 0],
    [12400, 50400, 0.12, 1240],
    [50400, 105700, 0.22, 5800],
    [105700, 201775, 0.24, 17966],
    [201775, 256225, 0.32, 41024],
    [256225, 640600, 0.35, 58448],
    [640600, Infinity, 0.37, 192979.25],
  ];
  for (const [lo, hi, rate, base] of brackets) {
    if (ti > lo && ti <= hi) return base + rate * (ti - lo);
  }
}
const AGI = 876509.32;
const itemizedAllowed = 88557.05;
const itemizedFull = 93617.45; // hypothetical, as if section 68 didn't exist
const taxableWith68 = AGI - itemizedAllowed;
const taxableNo68 = AGI - itemizedFull;
const taxWith68 = tax2026Single(taxableWith68);
const taxNo68 = tax2026Single(taxableNo68);
console.log('taxable income, actual (with section 68)', taxableWith68.toFixed(2));
console.log('taxable income, hypothetical (no section 68)', taxableNo68.toFixed(2));
console.log('tax, actual', taxWith68.toFixed(2));
console.log('tax, hypothetical', taxNo68.toFixed(2));
console.log('extra federal tax from section 68', (taxWith68 - taxNo68).toFixed(2));
console.log('marginal value of Danas next itemized dollar: 37% x (1 - 2/37) =', (0.37*(1-2/37)*100).toFixed(2) + '%');
"

taxable income, actual (with section 68) 787952.27
taxable income, hypothetical (no section 68) 782891.87
tax, actual 247499.59
tax, hypothetical 245627.24
extra federal tax from section 68 1872.35
marginal value of Danas next itemized dollar: 37% x (1 - 2/37) = 35.00%

Both taxable-income figures land well inside Dana's 37% bracket, so the calculation is clean: §68 costs Dana $1,872.35 in additional federal tax for 2026 relative to a world where the rule didn't exist. And because she's in the "itemized-bound" zone, the derivation isn't a loose approximation — it's exact: her next dollar of mortgage interest or charitable giving this year is worth 35 cents in tax savings, not 37, because that marginal dollar itself gets haircut by 2/37 before the 37% rate applies to what's left.

The Other Side of the "Lesser Of": When Your Next Dollar Isn't Discounted at All

Marcus, a single freelance executive coach with $690,000 of net profit, $10,000 of SALT (also floored), $18,000 of mortgage interest, and $20,000 of charitable giving, illustrates the opposite corner of the same formula.

node -e "
function tax2026Single(ti) {
  const brackets = [
    [0, 12400, 0.10, 0],
    [12400, 50400, 0.12, 1240],
    [50400, 105700, 0.22, 5800],
    [105700, 201775, 0.24, 17966],
    [201775, 256225, 0.32, 41024],
    [256225, 640600, 0.35, 58448],
    [640600, Infinity, 0.37, 192979.25],
  ];
  for (const [lo, hi, rate, base] of brackets) {
    if (ti > lo && ti <= hi) return base + rate * (ti - lo);
  }
}
const netProfit = 690000;
const seTaxBase = netProfit * 0.9235;
const ssWageBase2026 = 184500;
const seTax = Math.min(seTaxBase, ssWageBase2026) * 0.124 + seTaxBase * 0.029;
const AGI = netProfit - seTax / 2;
const floor = 0.005 * AGI;
const charitableAllowed = 20000 - floor;
const itemizedFull = 10000 + 18000 + charitableAllowed;
const threshold = 640600;
const excess = AGI - threshold;
const bound = Math.min(itemizedFull, excess);
const reduction = (2/37) * bound;
const itemizedAllowed = itemizedFull - reduction;
const taxableWith68 = AGI - itemizedAllowed;
const taxableNo68 = AGI - itemizedFull;
console.log('AGI', AGI.toFixed(2));
console.log('itemized total before section 68', itemizedFull.toFixed(2));
console.log('excess over threshold', excess.toFixed(2));
console.log('bound:', itemizedFull <= excess ? 'itemized total' : 'income excess (partial)');
console.log('section 68 reduction', reduction.toFixed(2));
console.log('taxable income, actual', taxableWith68.toFixed(2), '(bracket:', taxableWith68 <= 640600 ? '35%' : '37%', ')');
console.log('extra tax from section 68', (tax2026Single(taxableWith68) - tax2026Single(taxableNo68)).toFixed(2));
const marginalHaircut = itemizedFull > excess ? 0 : 2/37;
console.log('haircut on Marcuss NEXT itemized dollar:', (marginalHaircut*100).toFixed(2) + '%');
"

AGI 669321.38
itemized total before section 68 44653.39
excess over threshold 28721.38
bound: income excess (partial)
section 68 reduction 1552.51
taxable income, actual 626220.50 (bracket: 35% )
extra tax from section 68 543.38
haircut on Marcuss NEXT itemized dollar: 0.00%

Two things stand out. First, Marcus's income before itemizing ($669,321.38) clears the $640,600 threshold, so §68 applies to him — but his final taxable income after itemizing ($626,220.50) lands in the 35% bracket, not 37%. That's the direct consequence of §68(a)(2)'s test running on income "increased by" itemized deductions rather than on final taxable income: it's possible to owe the §68 reduction in a year your return never shows a dollar taxed at 37%. Second, because his itemized total ($44,653.39) is larger than his income's excess over the threshold ($28,721.38), the reduction is capped at that fixed excess — it doesn't grow if he itemizes more. Practically: Marcus's next charitable dollar this year isn't discounted by §68 at all; it's worth his full 35% bracket rate. Dana's next dollar is discounted to 35% of a 37% rate. Same statute, same year, opposite marginal answer — which side of the "lesser of" you land on is worth checking before timing a large deduction.

The Coordination Rule With §199A (QBI)

The same OBBBA section that revived §68 also amended §199A specifically to coordinate with it. §199A(e)(1), as amended, now reads:

"Except as otherwise provided in subsection (g)(2)(B), taxable income shall be computed without regard to section 68 and without regard to any deduction allowable under this section."

That "taxable income" definition governs every use of the term inside §199A — both the SSTB/wage-limit threshold comparison and the 20%-of-taxable-income overall cap on the QBI deduction. Practically, it means the taxable-income figure that caps your QBI deduction is computed as if the §68 haircut never happened, not from your actual, post-haircut return.

Using Dana's own numbers as an illustration — hypothetically, if her practice weren't an SSTB and the wage/property limit weren't binding, so the 20%-of-taxable-income cap were the operative constraint:

node -e "
const AGI = 876509.32;
const itemizedFull = 93617.45; // pre-section-68 total
const itemizedAllowed = 88557.05; // post-section-68 total
const tiNo68 = AGI - itemizedFull; // per section 199A(e)(1): taxable income without regard to section 68
const tiWith68 = AGI - itemizedAllowed; // actual, post-haircut taxable income (the wrong input)
console.log('correct 20% cap, per 199A(e)(1)', (0.20 * tiNo68).toFixed(2));
console.log('incorrect 20% cap, using actual post-haircut taxable income', (0.20 * tiWith68).toFixed(2));
console.log('difference', (0.20 * (tiWith68 - tiNo68)).toFixed(2));
"

correct 20% cap, per 199A(e)(1) 156578.37
incorrect 20% cap, using actual post-haircut taxable income 157590.45
difference 1012.08

Using the wrong (actual, post-haircut) taxable income figure overstates the 20% cap by $1,012.08 in this example — exactly 20% of the §68 reduction itself. This is a ceiling calculation only: whether it changes Dana's actual QBI deduction depends on whether the taxable-income cap, rather than the SSTB phase-out or the W-2-wage/2.5%-of-property limit, is the binding constraint for her specific business — the corpus's QBI deduction guide walks through all three independently, and none of them should be assumed clear just because this one is.

Does PTET Get You Around This?

If you've already converted from Schedule C to an S-corp or organized as a multi-member LLC and elected the pass-through entity tax (PTET) workaround, the state income tax your entity pays is deducted at the entity level under IRS Notice 2020-75 — it reduces the profit reported on your K-1 before that income ever becomes your personal taxable income. It never becomes a Schedule A itemized deduction, so §68 has no mechanism to reach it: subsection (a) only reduces "itemized deductions," and an entity-level business expense was never one.

That's not an option for Dana or Marcus as sole proprietors — a Schedule C filer has no entity through which to make a PTET election, and their full personal SALT bill (capped at $10,000 either way, given their income) sits inside the same itemized total §68 haircuts along with everything else. For a freelancer weighing an S-corp conversion who's already this far into the top bracket, §68 is one more reason PTET-eligible entity structures are worth modeling explicitly rather than assuming the personal SALT cap increase alone settled the question.

Common Mistakes to Avoid

1. Assuming the old Pease exceptions still apply. Medical expenses, investment interest, casualty losses, and gambling losses were exempt from the pre-2018 version. The 2026 version has no exception subsection at all — everything itemized is exposed.
2. Computing the reduction as a flat percentage of your whole itemized total without checking the "lesser of." If your income's excess over the threshold is the smaller number, the reduction is capped there — it doesn't scale with your itemized total the way a flat-percentage assumption implies.
3. Applying §68 before the SALT cap, its MAGI phase-down, or the new 0.5% charitable floor. §68(b) requires those other limitations to run first; skipping the order overstates the itemized total the 2/37 reduction is calculated on.
4. Assuming §68 tracks your final taxable income rather than your income before itemizing. As Marcus's example shows, you can owe the reduction in a year your actual bracket never touches 37%.
5. Feeding your actual, post-haircut taxable income into the QBI 20% cap. §199A(e)(1) specifically requires the pre-§68 figure; using the wrong one overstates the cap.
6. Treating an existing PTET election as obsolete once you clear the §68 threshold. The entity-level deduction was never itemized in the first place and remains completely outside §68's reach.
7. Assuming this applies to you because your gross revenue is large. §68 runs off taxable income after the half-SE-tax deduction and other above-the-line items, not gross Schedule C receipts — a business with high revenue and thin margins may never clear the threshold at all.

How CentSense Helps

None of this math is possible without knowing, to the dollar, what you actually paid in mortgage interest, charitable gifts, and state and local tax for the year — and once §68 is in play, the marginal value of every one of those dollars depends on precise totals, not rough estimates. CentSense scans and categorizes every business receipt the moment you take the photo, so your Schedule C figures (and the net-profit number that ultimately decides whether §68 applies to you at all) are never a year-end reconstruction project. Pair that with the corpus's standard vs. itemized deduction guide to work the full itemize-or-not decision once your totals are in hand. Free tier includes 10 AI receipt scans a month, no credit card required; the Solo plan ($5/month) adds unlimited scans, mileage tracking, and a CPA-ready CSV export.

Authoritative References

• IRC §68 — Overall limitation on itemized deductions — current text (subsections (a)-(b) only) as rewritten by Pub. L. 119-21, title VII, §70111(a)
• IRC §199A — Qualified Business Income — subsection (e)(1), the coordination rule with §68, added by §70111(b)
• IRC §170 — Charitable contributions — subsection (b)(1)(I), the new 0.5%-of-AGI floor, added by §70425(a)(1)
• IRC §164 — Taxes — subsection (b)(7), the SALT cap and MAGI phase-down referenced in the worked example
• IRS Rev. Proc. 2025-32 (published as IRB 2025-45) — 2026 tax bracket thresholds and standard deduction figures used throughout
• Social Security Administration, "Cost-of-Living Increase and Other Determinations for 2026," 90 Fed. Reg. (Nov. 3, 2025), document 2025-19763 — the 2026 OASDI contribution and benefit base ($184,500)
• Pub. L. 119-21 (One Big Beautiful Bill Act), signed July 4, 2025, title VII, §§70111, 70425

Related reading: SALT cap increase for freelancers · QBI deduction for freelancers · Pass-through entity tax (PTET) for freelancers · Standard vs. itemized deduction for freelancers · §1202 QSBS for freelancers

Once you know your actual net profit and your actual itemized totals — not estimates — the §68 math above takes minutes to run for your own numbers. Start free → and let CentSense keep those totals accurate all year instead of reconstructing them every April.

This article is educational and not tax or financial advice. It reflects IRC §68, §170(b)(1)(I), and §199A(e)(1) as amended by the One Big Beautiful Bill Act (Pub. L. 119-21) and 2026 figures from Rev. Proc. 2025-32, current as of September 22, 2026. Whether §68 applies to you, and how it interacts with your specific QBI deduction or entity structure, are facts a CPA, EA, or tax attorney should confirm against your actual return.