The Phase-Out of Itemized Deductions

Higher-income taxpayers may find the amount of their itemized deductions reduced for tax year 2013. The American Taxpayer Relief Act, signed into law in 2012, targets specific itemized deductions for new phase-out regulations. Because higher-income taxpayers generally have higher itemized deductions, the goal is to reduce the dollar amount these taxpayers can use to reduce their taxable income. However, higher-income taxpayers can still take the full deduction for the remaining itemized deduction to lower their tax bill.

Phase-Out Thresholds

The phase-out threshold is based on the taxpayer’s filing status and adjusted gross income. For a taxpayer with a single filing status, the AGI threshold is $250,000. For taxpayers filing as head of household, the threshold is $275,000. For married couples filing jointly or for a surviving spouse, the AGI threshold is $300,000. For married couples filing separately, the threshold is $150,000. The IRS will adjust these amounts for inflation after tax year 2013.

Itemized Deduction Limits

The itemized deduction phase-out affects the mortgage interest deduction, charitable contributions deduction, state income tax deduction and property tax deduction. These deductions are reduced by 3 percent of the difference between the taxpayer’s AGI and his AGI threshold. However, this phase-out reduction cannot exceed 80 percent of the taxpayer’s total itemized deductions for the tax year. Taxpayers are entitled to take at least 20 percent of their total itemized deductions.

Calculating Phase-Out Amount

Taxpayers need their filing status and AGI to calculate their phase-out amount. For example, say a taxpayer files as head of household and has an AGI of $375,000. In tax year 2013, she made charitable contributions of $20,000 and paid $30,000 of mortgage interest. Her total itemized deductions are $50,000. Calculate her excess AGI by subtracting her $275,000 AGI threshold from her $375,000 AGI to get $100,000. Multiply the excess AGI of $100,000 by 3 percent to get the $3,000 itemized deduction phase-out amount. Of her $50,000 total itemized deductions, only $47,000 can be listed on her Schedule A.

Phase-Out Tax Planning

Higher-income taxpayers can maximize itemized deductions not affected by the phase-out regulations. Taxpayers can deduct up to 10 percent of their medical expenses that exceed their AGI. Taxpayers can still take the maximum amount of their investment interest deduction and the casualty and theft deduction. Other itemized deductions left unchanged by the phase-out rules are gambling losses, unreimbursed employee expenses, tax preparation fees and miscellaneous expenses such as safe deposit box fees.