What happened to my deductions?

Josh Nowack

April 8, 2015

As some of you may have found out the hard way, some of your total itemized deductions are subject to phaseout this year. Sadly my calculator isn't broken.  The laws have changed. Under the phaseout, the total itemized deduction amount shown on your return can be less than the sum of the individual deduction amounts. For example, you can have $10,000 in mortgage interest deductions, $10,000 in state and local taxes, and $7,000 in charitable contributions, and wind up with an itemized deduction that is less than $27,000.

This can occur because total itemized deductions are reduced for taxpayers with adjusted gross income (AGI) above specified levels. The general rule is that certain itemized deductions are reduced by 3% of the amount by which your AGI exceeds $309,900 in 2015. (For single filers, the threshold amount is $284,050 in 2015.)

There are several limitations that make the reduction rule (also called the “Pease limitation” or “overall limitation”) less onerous:

(1) Certain itemized deductions aren't subject to the reduction rules and are always fully deductible. These “protected” deductions are medical expenses, investment interest, casualty and theft losses, and gambling losses.
(2) No matter how high your AGI is, you can never lose more than 80% of your other (unprotected) itemized deduction total. That is, you are always allowed to deduct at least 20% of these itemized deductions.

These rules can be expressed as a formula as follows: Your itemized deductions are reduced by the lesser of;

. . . 3% of the excess of AGI above the threshold amount, or
. . . 80% of the itemized deductions subject to the reduction rules.

Example. For 2015, Larry has the following itemized deductions: $10,000 mortgage interest, $12,000 state and local property and income taxes, and $5,000 in charitable deductions, for a total of $27,000, all “unprotected” from the reduction rules. Larry's AGI is $324,050, which is $40,000 above the threshold for 2015. His itemized deductions for the year will be reduced by $1,200. This is the $27,000 total reduced by the lesser of:

(a) $1,200 (3% of $40,000), or
(b) $21,600 (80% of $27,000).

Now if you're still tracking with me, I'll give you the simple answer - the tax code now reduces the effectiveness of your deductions if you make "too much money."  

Sorry to be the bearer of bad news.

--Josh

   

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