What is the itemized deduction reduction?
Higher income taxpayers face limits on their itemized deductions. This reduction of itemized deductions is often referred to as the 3 percent floor. Prior to 2006, these itemized taxpayers could lose up to 80 percent of the value of their deductions because most itemized deductions must be reduced by 3 percent of the amount by which the taxpayer’s adjusted gross income exceeds a certain amount which is adjusted annually for inflation (currently $150,500 or $75,250 for married people filing separately). For the years 2006 and 2007 the reduction on itemized deductions for affected taxpayers is reduced by one-third. Example: In the 2006 tax year, a married couple filing jointly has $1,000,000 in adjusted gross income (AGI). Because the couple’s AGI exceeded $150,500, the phase-out rules will apply to the couple’s itemized deductions. Itemized deductions for the couple were $150,000.* 1. AGI $1,000,000 2. Excess of couple’s AGI over $150,500 threshold $849,500 3. Calculate 3% of excess (3%
