Itemized Deduction Reductions

I’ve been writing about the items you can deduct on your taxes, as well as a few expenses that are not deductible.  You probably have started organizing your receipts to take advantage of the deductions you can claim.  However, there is a caveat that I need to make you aware of.

Did you work another job to make ends meet?  Did your income go up?  Did your spouse go back to work?  I ask these questions to make you think if you income went up last year.  If so, you may face a reduction in the amount you can claim in itemized deductions.  For 2013 and the foreseeable future, if your income is greater than $300,000 if you are filing as married filing joint, $150,000 if filing married filing separately, or $250,000 if filing single, you will see a deduction limitation that is the lesser of either (1) 3% of the adjusted gross income above the aforementioned amounts or (2) 80% of the allowable itemized deductions.

So what does this mean?  Let’s say you and your spouse are filing jointly, and have an adjusted gross income of $500,000.  You have $21,000 in itemized deductions, with the following itemized deductions:

  • Mortgage interest – $5,000
  • Property Tax – $6,000
  • Charitable Deductions – $10,000

Looking at the two methods of reductions, let’s see how much the reduction would be.

  1. 3% x $200,000 ($500,000 – $300,000) would reduce your itemized deductions by $6,000
  2. 80% x $21,000 would reduce the itemized deductions by $16,800

Based on these calculations, the $6,000 in reductions would the lesser reduction.  Therefore, the $21,000 in itemized deductions would be reduced by the $6,000, leaving you $15,000 in itemized deductions.

Keep in mind that these limitations do not apply to deductions for medical expenses, investment interest, or casualty, theft, or gambling losses.  However, since the deduction for medical expenses requires that you can only take a deduction for expenses greater than 10% of your adjusted gross income in 2013.

So how do you avoid running into this situation.  First, try to reduce your adjusted gross income by making contributions to retirement plans.  Second, talk to your accountant about planning out your deductions over a couple of years so you can lessen the impact in one particular year.

Have you ever run into a situation where your itemized deductions were reduced on your tax return due to income limits?    I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

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