§68 limitation base uses an AGI-minus-exemptions proxy instead of taxable income determined without §68 #9170

Activity

1. MaxGhenis commented on Oct 12, 2026

   

   MaxGhenis

   on Oct 12, 2026

   ContributorAuthor

   More actions

   Confirmed on main at ad02ee1, with the law extracted below. Fix: #10136.

   What main does

   itemized_taxable_income_deductions_reduction (2026 branch) sets section 68(a)(2)'s taxable income to max_(0, agi - exemptions). That ignores every deduction an itemizer takes besides itemized deductions. Main on a 2026 single filer with $600,000 of wages and $100,000 of qualified REIT dividends (also entered as ordinary dividends), and $50,000 of charitable deductions:

   	main	statute (below)
   QBI deduction	20,000	20,000
   section 68 reduction	2,702.70	2,129.73
   itemized deductions allowed	47,297.30	47,870.27

   With $300,000 of the $700,000 as REIT dividends, main still reduces by $2,702.70; the statute gives $0.

   The law

   Section 68(a), as rewritten by P.L. 119-21, sec. 70111(a), 139 Stat. 164-165 (govinfo HTML of P.L. 119-21, the text under "SEC. 70111. LIMITATION ON TAX BENEFIT OF ITEMIZED DEDUCTIONS"):

   "(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."

   The same section amends section 199A, and makes both changes effective together:

   "(b) Limitation Not Applicable to Determination of Deduction for Qualified Business Income.-- (1) In general.--Section 199A(e)(1) is amended by inserting without regard to section 68 and'' after shall be computed''. ... (c) Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2025."

   Section 199A(e)(1) as amended (Cornell LII, current text, under "(e) Other definitions"):

   "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."

   Section 63(b) and (d) (OLRC, "Text contains those laws in effect on September 27, 2026", fetched 2026-09-28; the same text on Cornell LII 2026-10-11). Section 63(b) is headed "Individuals who do not itemize their deductions" and lists what such an individual subtracts from AGI:

   "(1) the standard deduction, (2) the deduction for personal exemptions provided in section 151, (3) any deduction provided in section 199A, (4) the deduction provided in section 170(p), (5) the deduction provided in section 224, (6) the deduction provided in section 225, (7) so much of the deduction allowed by section 163(a) as is attributable to the exception under section 163(h)(4)(A), and (8) so much of the deduction allowed by section 165(a) as is attributable to the qualified net disaster loss (as defined in section 165(h)(6)(B))."

   "(d) Itemized deductions. For purposes of this subtitle, the term "itemized deductions" means the deductions allowable under this chapter other than— (1) the deductions allowable in arriving at adjusted gross income, and (2) any deduction referred to in any paragraph of subsection (b)."

   So none of the deductions in (2)-(8) is an itemized deduction, whether or not the filer itemizes. For an itemizer, taxable income determined without section 68 and increased by the itemized deductions is AGI less personal exemptions and those deductions. In PolicyEngine they are exemptions, qualified_business_income_deduction, tip_income_deduction, overtime_income_deduction, additional_senior_deduction and auto_loan_interest_deduction. Wagering losses (section 165(d)) are not in 63(b), so they are itemized deductions and are added back.

   Scope of (2) for the senior deduction: the deduction is in section 151(d)(5)(C), and P.L. 119-21 sec. 70103, which adds it, is headed "TERMINATION OF DEDUCTION FOR PERSONAL EXEMPTIONS OTHER THAN TEMPORARY SENIOR DEDUCTION". The 2026 draft forms (below) place it with the tips, overtime and car-loan deductions on Schedule 1-A line 44, outside Schedule A.

   The 37 percent bracket starts, Rev. Proc. 2025-32, sec. 4.01 (PDF pp. 10-12): Table 1 (joint, surviving spouse) "Over $768,700"; Tables 2 and 3 (head of household, single) "Over $640,600"; Table 4 (separate) "Over $384,350".

   Corroboration from the IRS 2026 drafts (marked "DRAFT—NOT FOR FILING"; not authority):

   2026 Schedule A draft, line 18 (PDF p. 3): "Is the amount on Form 1040 or 1040-SR, line 11b, minus the amounts on lines 13a and 13b of that form, more than $384,350?"

   2026 Form 1040 draft (created 8/19/26), PDF p. 3: "13a Additional deductions from Schedule 1-A, line 44" and "13b Qualified business income deduction from Form 8995 or Form 8995-A".

   2026 Schedule 1-A draft, line 44 (PDF p. 4): "Add lines 15, 27, 36, and 43. Enter here and on Form 1040, 1040-SR, or 1040-NR, line 13a". Lines 15, 27, 36 and 43 end Parts II (tips), III (overtime), IV (car loan interest) and V (seniors).

   The line 18 screen is AGI less the Schedule 1-A deductions and the QBI deduction, compared with the lowest bracket start.

   Worked example (statute arithmetic)

   2026, single, AGI $700,000, of which $100,000 is qualified REIT dividends, and $50,000 of itemized deductions.

   1. Section 199A taxable income, without section 68 or the 199A deduction: 700,000 − 50,000 = 650,000.
   2. QBI deduction: the lesser of 20% × 100,000 = 20,000 (199A(b)(1)(B)) and 20% × 650,000 = 130,000 (199A(a)(2)): 20,000.
   3. Taxable income without section 68: 700,000 − 50,000 − 20,000 = 630,000. Increased by the itemized deductions: 680,000.
   4. Excess over $640,600: 39,400. The lesser of 50,000 and 39,400 is 39,400.
   5. Reduction: 2/37 × 39,400 = 2,129.73. Allowed itemized deductions: 47,870.27. Taxable income: 700,000 − 47,870.27 − 20,000 = 632,129.73.

   There is no circularity. The QBI deduction's taxable income ignores section 68 (199A(e)(1)), so it is fixed before the limitation, and the limitation then nets it out of leg (2).

   How much it matters

   Under current-law parameters, only the QBI deduction changes results. The other 63(b) deductions are fully phased out at any income where leg (2) can exceed the bracket start:

   • Section 224(b) caps tips at $25,000 and reduces them by "$100 for each $1,000 by which the taxpayer's modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return)". That is zero from $400,000 ($550,000 joint).
   • Section 225(b) caps overtime at $12,500 ($25,000 joint), with the same reduction. That is zero from $275,000 ($550,000 joint).
   • Sections 224(f) and 225(e) allow neither to a married filer on a separate return.
   • Section 163(h)(4)(C) caps car loan interest at $10,000 and reduces it by $200 per $1,000 over $100,000 ($200,000 joint). That is zero from $150,000 ($250,000 joint).
   • Section 151(d)(5)(C)(iii) reduces the $6,000 senior deduction by 6 percent of MAGI over $75,000 ($150,000 joint).

   MAGI is at least AGI, and leg (2) exceeds the bracket start only if AGI does. They matter for reforms that widen those phase-outs, and the fix covers them.

   The disaster loss (63(b)(8))

   Section 63(b)(8) was added by P.L. 119-108 (Doug LaMalfa Federal Disaster Tax Relief Certainty Act), sec. 2(c), 140 Stat. 1020, approved Sept. 11, 2026. Section 2(d)(1) says: "The amendments made by this section shall apply to taxable years beginning after December 31, 2024." By 63(d)(2), a qualified net disaster loss is not an itemized deduction either. PolicyEngine cannot put one in the section 68 base today: casualty_loss_deduction is p.active * amount_over_floor, and gov.irs.deductions.itemized.casualty.active is false from 2018-01-01. So nothing changes now. Whoever models disaster losses (#9920) should keep the qualified net disaster loss out of total_itemized_taxable_income_deductions and list it among the deductions an itemizer takes besides itemized deductions.

   Evidence (extracts, PDFs, SHA-256 sums): ~/PolicyEngine/_drafts/irc68-ti-leg-2026-10-11/evidence/.
2. MaxGhenis

   closed this as completedin #10136on Oct 12, 2026
3. hua7450

   added a commit that references this issue on Oct 12, 2026

   Net the 2026 section 68 taxable-income leg of the QBI and other non-i…

   ...

   This issue will close once commit 2e9eea7 is merged into the 'master' branch.

   2e9eea7