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A Lower Cap on the Marginal Tax Benefit of Itemized Deductions

Tax Policy
PWBM ·

Revenue and distributional effects of lowering the cap on the marginal tax benefit of itemized deductions to 32% or 24%.

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The One Big Beautiful Bill Act (OBBBA) instituted a cap on the marginal tax benefit of itemized deductions of 35 percent beginning in 2026. We present conventional 10-year revenue forecasts and distributional tables for two options: Lower the cap on the marginal tax benefit of itemized deductions from 35 percent to 32 percent (Option 1) or to 24 percent (Option 2), beginning in 2026.

Table 1 shows that the 32 percent cap would raise $110 billion over ten years. The 24 percent cap would raise $475 billion over ten years.

Table 1: Estimated Revenue Effects,
FY 2026–2035

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Table 1: Estimated Revenue Effects, FY 2026–2035
Provision 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Total, 2026–2035
Option 1: Cap Itemized Deductions at 32% 4.8 10.0 10.4 10.9 11.2 11.3 12.0 12.6 13.2 14.0 110.4
Option 2: Cap Itemized Deductions at 24% 21.0 44.6 46.9 49.1 50.2 47.0 49.7 52.6 55.6 58.6 475.3

Note: Change in revenue, billions of dollars.

Table 2 presents conventional distributional analysis. Option 1 mostly impacts those in the top 10 percent of the income distribution while Option 2 impacts those in the top 20 percent.

Table 2: Estimated Distributional Effects,
TY 2027

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Table 2: Estimated Distributional Effects, TY 2027
Income Group Lower Cutoff ($) Avg. Change in After-Tax Income ($) Avg. % Change in After-Tax Income
Option 1: Cap Itemized Deductions at 32%
First quintile 0 0 0%
Second quintile 18,000 0 0%
Middle quintile 53,000 0 0%
Fourth quintile 96,000 0 0%
80–90% 179,000 0 0%
90–95% 272,000 −55 0%
95–99% 401,000 −470 −0.1%
99–99.9% 1,020,000 −2,425 −0.2%
Top 0.1% 4,451,000 −22,990 −0.2%
Option 2: Cap Itemized Deductions at 24%
First quintile 0 0 0%
Second quintile 18,000 0 0%
Middle quintile 53,000 0 0%
Fourth quintile 96,000 0 0%
80–90% 179,000 −50 0%
90–95% 272,000 −255 −0.1%
95–99% 401,000 −2,680 −0.6%
99–99.9% 1,020,000 −9,190 −0.7%
Top 0.1% 4,451,000 −90,535 −0.7%

Note: TY = tax year.