Sticker Shock About 2013 Taxes - Part 2

Another change that will result in higher taxes for some taxpayers with substantial income is the phase-out of itemized deductions. If a taxpayer's Adjusted Gross Income (AGI) exceeds the threshold amount*, his or her itemized deductions are reduced by 3% of the excess amount.

*THRESHOLD AMOUNT
$300,000 for Married Filing Jointly (MFJ)
$250,000 for Single
$275,000 for Head of Household (HOH)
$150,000 for Married Filing Separately (MFS)

Not all itemized deductions are subject to phase-out. The following deductions are excluded: 

- Medical and dental expenses 
- Investment interest expenses 
- Casualty and theft losses from personal-use property 
- Casualty and theft losses from income-producing property 
- Gambling losses 

The maximum phase-out is 80% of deductions subject to phase-out; so a taxpayer will always receive a deduction of at least 20% of these items.

As an example, if a taxpayer (filing MFJ) has AGI of $400,000, he or she will lose $3,000 of otherwise allowable deductions for home mortgage interest, taxes and charitable contributions: ($400,000 - $300,000) x 3% = $3,000.

Conventional wisdom is to ALWAYS maximize deductions. However, if a taxpayer is subject to the phase-out because of extraordinary income for the current year, it might be advisable to defer paying deductible expenses to the following year to the extent possible.

As always, please post a comment if you have any general questions and I will be happy to respond. I can also be reached at lencarusi@gmail.com or (203) 807-3263 if you have any specific issues you would like to discuss.