Itemized Deduction - Limitations

Limitations

If the taxpayer's adjusted gross income is above a threshold (or "applicable amount"), then the total allowable itemized deductions is reduced by 1/3 of the lesser of

• 3% of the excess of adjusted gross income over $166,800; or
• 80% of the total itemized deductions otherwise allowable

In 2009, the threshold adjusted gross income is $166,800 ($83,400 if married filing separately).
So, for example, if one's adjusted gross income is $300,000 and one has $20,000 in itemized deductions, first figure out 3% of the excess above $166,800:

Then figure out 80% of the total deductions

Finally, determine which value is lesser, then take 1/3 of this value. In this instance, the lesser value is $3996 so the taxpayer's total itemized deductions shall be reduced by $3996 divided by 3, or $1332. This means out of the $20,000 itemized deductions claimed, only $18668 will be allowed.

Even though the Internal Revenue Code sets the applicable amount at $100,000, that amount is subject to inflation. Therefore, it's necessary to double-check the Consumer Price Index for the applicable amount for the current year.

In addition, this limitation on itemized deductions is applied after any other limitation. This means that you first need to figure out the total allowable miscellaneous itemized deductions, etc., before determining any limits on the total amount of deductions.