2007 Limits on Itemized Deductions
People can easily go deduction crazy when they have moved into a higher tax bracket. It is extremely painful to see all that income going to the IRS. The IRS, however, has issued the 2007 limits on itemized deductions.
The Internal Revenue Service has set a limit on itemized deductions that is based on the tax payers Adjusted Gross Income (AGI). The AGI limit is $156, 400 ($78,200 if married filing separately). What this means is that you have to apply a certain limiting factor to your itemized deductions once you go over that amount of earnings. The 2007 limits on itemized deductions only apply to certain deductions, however.
The deductions that are effected include taxes paid (line 9), Interest paid (lines 10,11,12,and 13), Investment Interest Expense (line 14), Gifts to Charity (line 19), and Job Expenses (line 27). The line numbers refer to Schedule A, Form 1040. The following items are not subject to the 2007 limits on itemized deductions, although they are subject to the individual limitations of the particular deduction. These include Medical and Dental Expense (Line 4), Investment Interest, (Line 14), Casualty and Theft Losses for personal property (line 20), and for income producing property (line 28).
If you are subject to the 2007 limits on itemized deductions, which means your AGI is over $156,400 ($78,200), you calculate a reduction in your itemized deductions using the following method. The reduction is going to be the smaller of 80% of the itemized deductions that are subject to the limit, or 3% of the amount by which your AGI exceeds $156,000. Which ever figure is smaller is further reduced by one-third and subtracted from your itemized deductions.
As always, you can then compare your total itemized deductions against the Standard deduction to determine which figure will yield the least taxable income. In most cases, this limit on deductions and the resulting reduction in itemized deductions will not eliminate the value of itemizing, but will simply reduce your overall total deductions. This will increase your taxes owed, of course, which is the purpose of the limits in the first place.
Often tax payers are discouraged when they hear of deduction limitations. It is understandable that high income tax payers would be so when they are forced to limit what they consider legitimate deductions that their lower income brethren can take fully. However, it should be remembered that the deductions are merely reduced and not totally eliminated. The person exceeding the 2007 limit on tax deductions because of a high adjusted gross income can still take advantage of itemized deductions and has even more incentive to do so than lower bracket tax payers.