Section 68 Limit 2026: IRS Draft Form 8960 Worksheet of October 16, 2026 Now Reaches Investment Interest
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Quick Answer
On October 16, 2026 the IRS posted a draft of the 2026 Instructions for Form 8960 that adds a new “Lines 9 and 10 Section 68 Limitation Worksheet,” because for taxable years beginning after December 31, 2025, section 68 once again cuts itemized deductions by 2/37 and no longer exempts investment interest. The cut is 2/37 of the lesser of the itemized deductions or the taxable income above the start of the 37% bracket, which is $640,600 for single and head-of-household filers and $768,700 for joint filers in 2026 (Rev. Proc. 2025-32). In the IRS’s own example (AGI $2,000,000, itemized deductions $155,000) the reduction is $8,378 and the net investment income tax is $12,432. In our arithmetic, that reduction adds only about $158 of NIIT, but the same $8,378 costs about $3,100 of income tax. This is a draft: as of November 4, 2026 it can still change.
Key Takeaways
- The draft Instructions for Form 8960 (2026) say that “certain itemized deductions, including investment interest, are no longer exempt from the section 68 limitation.” The draft listing on irs.gov shows the instructions posted 10/16/2026 and the Form 8960 draft posted 06/01/2026.
- The old section 68(c) excluded medical expenses (section 213), investment interest (section 163(d)) and casualty and theft losses from the limit. Pub. L. 119-21 section 70111(a) rewrote section 68 generally, and the new text has no exclusions. It applies to taxable years beginning after December 31, 2025.
- The reduction is 2/37 of the lesser of the itemized deductions or the taxable income (before the reduction, plus the itemized deductions) above the start of the 37% bracket. For 2026 that start is $640,600 single and head of household, $768,700 joint, $384,350 married filing separately and $16,000 for estates and trusts (Rev. Proc. 2025-32).
- The draft worksheet has 15 lines in five parts. It prints a multiplier of 5.4% on line 9, while the statute says 2/37 (5.405%). On the IRS’s $155,000 example the printed lines give $8,370 and the draft’s own text says $8,378; the NIIT rounds to $12,432 either way (our arithmetic).
- For the IRS example the section 68 reduction raises NIIT by $158.16 (our arithmetic: $12,432.16 less $12,274.00 with no reduction), because only the share of the reduction that falls on deductions allocable to investment income reaches Form 8960. The reduction itself costs about $3,100 of income tax at 37% (our arithmetic).
- The reduction does not touch the NIIT threshold test. Modified adjusted gross income starts from AGI, which itemized deductions never reduce, and the thresholds in section 1411(b) stay $200,000 single and $250,000 joint (our reading).
- Section 68(b) says the section “shall be applied after the application of any other limitation on the allowance of any itemized deduction.” So the investment interest cap in section 163(d), the 0.5% charitable floor and the SALT cap come first, then the 2/37 cut (our reading).
CSV · 71 rows
Section 68 limit 2026: Code text, thresholds, IRS draft worksheet and worked examples
71 rows: 26 U.S.C. 68 before and after Pub. L. 119-21, Rev. Proc. 2025-32 thresholds, the draft Form 8960 instructions of October 16, 2026 with the IRS example, and our arithmetic.
What the IRS posted on October 16, 2026
The IRS draft forms list shows two 8960 items for 2026: the form (posted 06/01/2026) and the instructions (posted 10/16/2026). The instructions open their “What’s New” section with a heading, “Overall limitation on itemized deductions in 2026,” and say that beginning in 2026 the section 68 changes “generally apply to individuals, estates, and trusts in the highest tax bracket.” A new worksheet, “Lines 9 and 10 Section 68 Limitation Worksheet for Individuals, Estates, and Trusts,” sits on page 20 of the draft.
The IRS cover page on the draft says it is for information, not for filing, and that drafts of instructions “usually have some additional changes before their final release.” We read the PDF at irs.gov/pub/irs-dft/i8960--dft.pdf on November 4, 2026. Anything below that comes from the draft is labelled as such, and the list of points to re-check is in the section near the end.
The draft Form 8960 itself did not change its line layout: line 9a is investment interest expenses, 9b is state, local and foreign income tax, 9c is miscellaneous investment expenses, line 10 is additional modifications and line 11 is the total of deductions and modifications. What changes is how the amounts for those lines are figured when the taxpayer’s income is above the 37% bracket start. For the general rules of the tax, see our guide to the net investment income tax and Form 8960.
What the Code says now, and what it said before
The Code text changed in one place. Pub. L. 119-21 section 70111(a) says that section 68 “is amended to read as follows,” and section 70111(c) makes the change effective for “taxable years beginning after December 31, 2025.” Section 70111(b) also adds a rule to section 199A so that the qualified business income deduction is computed without regard to section 68.
| Item | Before 2026 (2024 edition of the Code) | From 2026 (current text) | What it means (our reading) |
|---|---|---|---|
| Status of section 68 | Section 68(f): the section did not apply to taxable years beginning after December 31, 2017 and before January 1, 2026 | Section 68 rewritten by Pub. L. 119-21 sec. 70111(a); effective for taxable years beginning after December 31, 2025 | The 2018-2025 pause ended with tax year 2025 |
| Formula | Lesser of 3% of AGI over an applicable amount or 80% of the itemized deductions | 2/37 of the lesser of the itemized deductions or taxable income (before the section and increased by the itemized deductions) above where the 37% bracket begins | Different trigger and different size: a cut of at most 5.4% of the deductions, tied to the 37% bracket |
| Medical, investment interest, casualty | Section 68(c) excluded sec. 213 medical expenses, any deduction for investment interest (as defined in section 163(d)) and certain sec. 165 losses | No exclusions in the new text | Investment interest is now inside the limit, which is why Form 8960 needs a worksheet |
| Estates and trusts | Section 68(e): the section did not apply to any estate or trust | Section 68(a) begins “In the case of an individual”; no estate and trust sentence | The statute text says individual. The draft instructions still carry an estate and trust column ($16,000). See the re-check list |
| Ordering | Section 68(d): applied after any other limitation | Section 68(b): applied after any other limitation on the allowance of any itemized deduction | Same rule: the 0.5% charitable floor, the SALT cap and the 163(d) cap come first |
| Bracket start used | Not used | “the dollar amount at which the 37 percent rate bracket under section 1 begins” | 2026: $640,600 single and head of household, $768,700 joint, $384,350 separate, $16,000 estates and trusts (Rev. Proc. 2025-32 sec. 4.01) |
Sources: 26 U.S.C. 68 (Cornell Legal Information Institute, current text, and United States Code 2024 edition, GPO); Pub. L. 119-21 sec. 70111 (govinfo.gov); Rev. Proc. 2025-32 (irs.gov). The plain-language column is our reading.
Two of our other pages already cover the 2/37 rule from the deduction side. The charitable deduction guide shows how the cut turns a 37-cent dollar into a 35-cent dollar, and the Form 4952 guide covers the investment interest cap. This page is about the third place the rule shows up: the NIIT computation.
The worksheet, line by line
The draft worksheet starts from the same two inputs as the statute: taxable income plus the itemized deductions on line 1 (“Itemized deductions are added back to taxable income to determine whether income exceeds the 37th percent rate bracket”), and the bracket start on line 2. Line 3 is the excess; if it is zero, the deductions are not limited and the taxpayer reports them in full on Form 8960 lines 9 and 10. The rest of the worksheet decides how much of the cut lands on deductions that offset investment income.
| Line | What the draft asks for | IRS example (unmarried, AGI $2,000,000) | Our arithmetic with the lines as printed |
|---|---|---|---|
| 1 | Taxable income (Form 1040, line 15) plus allowable itemized deductions | Not shown | $2,000,000, if there are no deductions other than the itemized ones |
| 2 | $768,700 joint; $640,600 single or head of household; $384,350 separate; $16,000 estates and trusts | $640,600 | $640,600 |
| 3 | Line 1 less line 2; if zero or less, enter zero and stop | Not shown | $1,359,400 |
| 4 | State, local and foreign income taxes allocable to investment income | $2,000 of the $10,000 SALT deduction | $2,000 |
| 5(a)-(e) | Other itemized deductions allocable to investment income, listed by Form 8960 line | Investment interest $75,000 | $75,000 |
| 6 | Lines 4 and 5(e): deductions allocable to investment income and subject to section 68 | $77,000 | $77,000 |
| 7 | Total itemized deductions subject to section 68 | $155,000 | $155,000 |
| 8 | Smaller of line 3 or line 7 | Not shown | $155,000 |
| 9 | Line 8 times 5.4% (0.054): the total reduction | $8,378 | $8,370.00 |
| 10 | Line 6 divided by line 7, to at least three decimal places | Not shown | 0.497 |
| 11 | Line 9 times line 10: the part of the cut allocable to investment deductions | $4,162 | $4,159.89 |
| 12 | Line 6 less line 11 | $72,838 | $72,840.11 |
| 13-15 | Split line 12 between Form 8960 line 9 (taxes) and line 10 (other deductions) | Not shown | Not applicable |
The IRS example continues: net investment income is $400,000 less $72,838, or $327,162, and the NIIT is $327,162 times 3.8%, or $12,432. In the draft, that figure goes to Schedule 2 (Form 1040), line 6.
Two things stand out when the example is run through the printed lines (our arithmetic). First, line 9 says to multiply by 5.4%, which is $8,370.00 on $155,000, while the draft’s own sentence shows $8,378, which is $155,000 times 2/37 ($8,378.38). The statute text says 2/37, and 2/37 is 5.405%. Second, the allocation ratio on line 10 is rounded to three places, so $77,000 divided by $155,000 becomes 0.497 and line 11 is $4,159.89 rather than $4,162. The NIIT is $12,432.08 by the printed lines and $12,432.16 by the draft’s figures, so both round to $12,432. That is one reason to check the final instructions for the multiplier.
What the cut costs: the NIIT is the small part
The NIIT is 3.8% of the lesser of net investment income or modified adjusted gross income above the threshold (26 U.S.C. 1411(a)(1)). Net investment income is gross investment income less “the deductions allowed by this subtitle which are properly allocable to such gross income or net gain” (section 1411(c)(1)(B)). Section 68 shrinks the itemized deductions that are allowed, so it shrinks the deductions that offset investment income, and net investment income goes up by the amount of the shrinkage that lands on them.
In the IRS example, $4,162 of the $8,378 cut falls on investment-related deductions, so net investment income is $4,162 higher and the NIIT is about $158 higher. The other $4,216 of the cut falls on the charitable and unallocated SALT deductions, which do not offset investment income anyway. At 37%, the full $8,378 of lost deduction costs about $3,100 of income tax (our arithmetic). The worksheet matters for accuracy on the return, but the money is mostly in the income tax.
| Single filer, itemized deductions $155,000 (the IRS mix), no other deductions | Income above $640,600 | Lesser of that and $155,000 | Section 68 reduction at 2/37 | Income tax cost of the cut |
|---|---|---|---|---|
| Income $640,600 | $0 | $0 | $0.00 | $0 |
| Income $700,000 | $59,400 | $59,400 | $3,210.81 | $1,123.78 (35% bracket) |
| Income $795,600 | $155,000 | $155,000 | $8,378.38 | $3,100 (37% bracket) |
| Income $1,000,000 | $359,400 | $155,000 | $8,378.38 | $3,100 (37% bracket) |
| Income $2,000,000 | $1,359,400 | $155,000 | $8,378.38 | $3,100 (37% bracket) |
All cells in this table are our arithmetic from the formula in 26 U.S.C. 68(a) and the $640,600 threshold in Rev. Proc. 2025-32. The cut reaches its maximum of 2/37 of the deductions once the income above $640,600 is at least as large as the deductions. The $1,123.78 cell applies 35% to $3,210.81 because taxable income of $545,000 is below $640,600; the other cells apply 37%.
Example B: $700,000 of income, $300,000 of it investment income (our arithmetic)
Assume a single filer with $400,000 of wages and $300,000 of interest and dividends, so income is $700,000, and no deductions other than itemized ones. Itemized deductions are $80,000: $40,000 of investment interest (below the net investment income cap in section 163(d)), $10,000 of state and local tax after the SALT cap (see our SALT cap guide), and $30,000 of charitable gifts after the 0.5% floor. The filer allocates the SALT deduction to investment income by the ratio of $300,000 to $700,000. These are assumptions, not a recommended method.
| Worksheet line | Amount | How |
|---|---|---|
| Line 1 and line 2 | $700,000 and $640,600 | Income plus the add-back, and the single threshold |
| Line 3 | $59,400 | $700,000 less $640,600 |
| Line 6 | $44,286 | $40,000 investment interest plus $4,286 of SALT ($10,000 times 300/700) |
| Line 7 | $80,000 | All itemized deductions |
| Line 8 | $59,400 | Smaller of line 3 and line 7 |
| Line 9 | $3,207.60 | $59,400 times 0.054 |
| Line 10 | 0.554 | $44,286 divided by $80,000 is 0.5536, rounded to three places |
| Line 11 | $1,777.05 | $3,207.60 times 0.554 |
| Line 12 | $42,508.95 | $44,286 less $1,777.05 |
| Net investment income | $257,491.05 | $300,000 less $42,508.95 |
| NIIT | $9,784.66 | $257,491.05 times 3.8%; it is below income above $200,000 ($500,000), so net investment income is the lesser amount |
| NIIT with no section 68 cut | $9,717.13 | ($300,000 less $44,286) times 3.8% |
| Income tax cost of the cut | $1,122.66 | $3,207.60 times 35%, because taxable income of $620,000 is below $640,600 |
In this case the reduction is smaller than the deductions because income is only $59,400 above the threshold, and the NIIT effect is $67.53. This is the pattern a reader with investment income of the same size will see: the further income is above the threshold, the more the cut approaches the full 2/37 of the deductions.
Where investment interest and the NIIT meet
Three separate caps now stack, and the order matters (section 68(b) puts the 2/37 cut last).
- Section 163(d) limits the investment interest deduction to net investment income for regular tax, with the excess “treated as investment interest paid or accrued” in the next year (section 163(d)(1)-(2)). That is the Form 4952 limit.
- Section 68 then reduces what is left. The statute text we read gives no carryforward for the amount removed by section 68; the 163(d) carryforward covers only amounts not allowed “by reason of paragraph (1)” (our reading).
- Section 1411 uses the deduction as finally allowed. The draft instructions say investment interest is entered on line 9a from Schedule A, line 9 (Form 4952, line 8 for estates and trusts), and that the section 68 worksheet should be used to “figure the allowable itemized deductions after applying section 68.”
Net investment income for section 163(d) and for section 1411 are different measures (our Form 4952 guide and NIIT guide cover each). For a reader whose investment interest comes through a real estate fund or BDC K-1, the amount on Form 4952 and the amount on Form 8960 line 9a are not guaranteed to be the same number, and the worksheet is the new step between them.
What is still open in the draft
| Open point | What we found | What to re-check |
|---|---|---|
| The multiplier on worksheet line 9 | The draft prints 5.4%; the statute says 2/37 (5.405%); the draft’s example amount of $8,378 matches 2/37 | Whether the final instructions print 2/37, 5.4% or a rounding instruction |
| Estates and trusts | Statute text: “In the case of an individual.” Draft worksheet: a $16,000 column for estates and trusts | Whether the final instructions keep the estate and trust column, and any Treasury or IRS guidance on section 68 for trusts |
| Where investment interest lands in Part V | Part V sends line 13 to Form 8960 line 9 and line 14 to line 10; investment interest is on line 9a | How the final worksheet routes investment interest (line 9a) back to the form |
| The income tax side | The draft Schedule A (Form 1040) 2026 asks on line 18 whether line 11b less lines 13a and 13b is more than $384,350, and points to an “Itemized Deductions Worksheet” in the instructions. The Schedule A instructions draft we downloaded on November 4, 2026 has no such worksheet text | That worksheet, when posted, is where the $8,378 in the example is figured for Form 1040 |
| Draft status | The IRS says drafts “usually have some additional changes before their final release” | irs.gov/draftforms and irs.gov/form8960 for a newer draft or the final version |
Decision points, and who does the work
The page above gives the mechanics. The decisions that depend on a reader’s own return are different: whether income will be above $640,600 (or $768,700 joint) in 2026, how much investment interest will be deducted at all, how the SALT and charitable deductions are allocated to investment income, and whether a year-end move such as paying a deductible expense in 2026 or 2027 changes the amount above the threshold. A CPA computes the Schedule A limits, Form 4952, the Form 8960 worksheet and the estimated payments; nothing in the draft tells a reader which allocation method is reasonable for their facts.
This is analysis of public documents, not investment, legal or tax advice.
What a reader can do with this
- Find your bracket start. $640,600 (single or head of household) or $768,700 (joint) of taxable income plus itemized deductions. Below it, section 68 does nothing to you in 2026.
- List every itemized deduction, including investment interest. Medical expenses and casualty losses used to sit outside the limit too, so they are now in the total on worksheet line 7.
- Write down how you allocate SALT and other deductions to investment income. The draft says a “reasonable” method is allowed and gives the ratio of investment income to AGI as one example; keep the calculation with your records.
- Ask your preparer to run the worksheet, not only Schedule A. The NIIT effect is small (about $158 in the IRS example), but a return that applies the cut to the income tax and ignores it on Form 8960 will not match the final instructions.
- Compare the cut with your estimated payments. If your 2026 itemized deductions are large and your income is well above the threshold, the cut is up to 2/37 of them. In the IRS example that is about $3,100 of income tax (our arithmetic).
- Re-check the instructions before filing. The draft can change; look for the final Instructions for Form 8960 (2026) and the 2026 Schedule A instructions at irs.gov. The year ends on Thursday, December 31, 2026, which is 57 days after November 4, 2026.
FAQ
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Sources, read and saved on November 4, 2026: 26 U.S.C. 68 (Cornell Legal Information Institute, current text), 1411 and 163; 26 U.S.C. 68, United States Code 2024 edition (GPO); Pub. L. 119-21 sections 70110 and 70111 (govinfo.gov); Rev. Proc. 2025-32 (irs.gov); draft Instructions for Form 8960 (2026), draft Form 8960 (2026) and draft Schedule A (Form 1040) 2026 with its instructions (irs.gov/pub/irs-dft); the IRS draft tax forms listing. Worked examples are our arithmetic on the cited figures. The IRS example is quoted from the draft; draft documents can change before they are final.
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