3 percent itemized deduction phase-out rule
Taxpayers with adjusted gross income (AGI) above a certain amount may lose part of their deduction for personal exemptions and itemized deductions. The provision began in the early 1990s and is scheduled to be repealed in 2010. The reduction of the itemized deduction originally required reducing your deductions by 3% of the amount that your AGI exceeds the threshold amount.
Starting in 2006, the general limit on certain deductions was phased out. Under this phase-out rule, the limit was lowered by one third in 2006 and will be reduced by one third in 2007, so that the 3% phase-out is reduced to 2%. In 2008 and 2009, the 3% phase-out will be reduced to 1%. The reduction will be eliminated in 2010.
For 2007, the amount you can claim as a deduction for exemptions is reduced once your AGI exceeds a certain level for your filing status. The threshold is indexed annually for inflation.
These levels are as follows:
Married filing separately: $ 117,300.
Individual – $ 156,400.
Head of household – $ 195,500.
Married filing joint return: $ 234,600.
Qualified widower – $ 234,600
You must reduce the dollar amount of your exemptions by 2% for every $ 2,500, or part of $ 2,500 ($ 1,250 if you are married and filing separately), that your AGI exceeds the amount shown above for your status civil for declaration purposes. However, you cannot lose more than 2/3 of the dollar amount of your exceptions. In other words, each exemption cannot be reduced to less than $ 1,133.
You may ask, “Am I subject to this limit?” The IRS considers that you are subject to the limit of certain itemized deductions if your adjusted gross income is more than $ 156,400 ($ 78,200 if you are married and file separately). Your adjusted gross income is the amount shown on line 38 of Form 1040.
The following deductions are subject to the general itemized deduction limit:
2) Interest paid
3) Gifts to charity
4) Work expenses and certain miscellaneous deductions
5) Other miscellaneous deductions (excluding gambling and casualty or theft losses)
The following deductions are NOT subject to the general limit:
1) Medical and dental expenses
2) Investment interest expenses
3) Casualty losses and theft of personal property
4) Casualty losses and theft of income-generating properties
5) Gambling losses
You can use the Detailed Deduction Worksheet in the instructions for Schedule A (Form 1040) to calculate your limit. You will enter the result on Schedule A (Form 1040).
You should compare the amount of your standard deduction to the amount of your itemized deductions after applying the limit. Use the greater amount when completing Form 1040, line 40.
To determine how to calculate your limit and see examples, visit www.real-estate-owner.com/itemized-deduction-reduction.html.
Also, to see an example of a worksheet used to determine what you can deduct, visit www.real-estate-owner.com/itemized-deduction-reduction-worksheet.html.