29.   Limit on Itemized Deductions

Table of Contents

    * What's New
    * Introduction
    * Useful Items - You may want to see:
    * Are You Subject to the Limit?
    * Which Itemized Deductions Are Limited?
    * Which Itemized Deductions Are Not Limited?
    * How Do You Figure the Limit?
          o Example

What's New

Katrina Emergency Tax Relief Act of 2005. This Act provides tax relief for
persons affected by Hurricane Katrina. Under the Act, you may be able to
treat certain gifts made by cash or check as qualified contributions not
subject to the limit on itemized deductions. See Publication 4492.
Introduction

This chapter discusses the overall limit on itemized deductions on Schedule
A (Form 1040). The topics include:

    *

      Who is subject to the limit,
    *

      Which itemized deductions are limited, and
    *

      How to figure the limit.

Useful Items - You may want to see:

Form (and Instructions)

    *

      Schedule A (Form 1040)
      Itemized Deductions

Are You Subject to the Limit?

You are subject to the limit on certain itemized deductions if your
adjusted gross income (AGI) is more than $145,950 ($72,975 if you are
married filing separately). Your AGI is the amount on Form 1040, line 38.
Which Itemized Deductions Are Limited?

The following Schedule A (Form 1040) deductions are subject to the overall
limit on itemized deductions.

    *

      Taxes様ine 9.
    *

      Interest様ines 10, 11, and 12.
    *

      Gifts to charity様ine 18.
    *

      Job expenses and most other miscellaneous deductions様ine 26.
    *

      Other miscellaneous deductions様ine 27, excluding gambling and
casualty or theft losses.

Which Itemized Deductions Are Not Limited?

The following Schedule A (Form 1040) deductions are not subject to the
overall limit on itemized deductions. However, they are still subject to
other applicable limits.

    *

      Medical and dental expenses様ine 4.
    *

      Investment interest expense様ine 13.
    *

      Gifts by cash or check made after August 27, 2005, that you elect to
treat as qualified contributions様ine 15b.
    *

      Casualty and theft losses from personal use property様ine 19.
    *

      Casualty and theft losses from income-producing property様ine 27.
    *

      Gambling losses様ine 27.

How Do You Figure the Limit?

If your itemized deductions are subject to the limit, the total of all your
itemized deductions is reduced by the smaller of:

    *

      3% of the amount by which your AGI exceeds $145,950 ($72,975 if
married filing separately), or
    *

      80% of your itemized deductions that are affected by the limit. See
Which Itemized Deductions Are Limited, earlier.

Before you figure the overall limit on itemized deductions, you first must
complete Schedule A (Form 1040), lines 1 through 27, including any related
forms (such as Form 2106, Form 4684, etc.).

The overall limit on itemized deductions is figured after you have applied
any other limit on the allowance of any itemized deduction. These other
limits include charitable contribution limits (chapter 24), the limit on
certain meals and entertainment (chapter 26), and the 2%-of-
adjusted-gross-income limit on certain miscellaneous deductions (chapter 28).
Itemized Deductions Worksheet.   After you have completed Schedule A (Form
1040) through line 27, you can use the Itemized Deductions Worksheet in the
Instructions for Schedule A (Form 1040) to figure your limit. Enter the
result on Schedule A (Form 1040), line 28. Keep the worksheet for your records.

Tip
You should compare the amount of your standard deduction to the amount of
your itemized deductions after applying the limit. Use the greater amount
when completing Form 1040, line 40. See chapter 20 for information on how
to figure your standard deduction.
Example

For tax year 2005, Bill and Terry Willow are filing a joint return on Form
1040. Their adjusted gross income on line 38 is $259,600. Their Schedule A
itemized deductions are as follows:
Taxes様ine 9 	  	$17,900
Interest様ines 10, 11, and 12 	  	45,000
Investment interest expense
様ine 13 	  	41,000
Gifts to charity様ine 18 	  	21,000
Job expenses様ine 26 	  	17,240
Total 	  	$142,140
  	  	 

The Willows' investment interest expense deduction ($41,000 from Schedule A
(Form 1040), line 13) is not subject to the overall limit on itemized
deductions.

The Willows use the Itemized Deductions Worksheet in the Schedule A (Form
1040) instructions to figure their overall limit. Their completed worksheet
is shown as Table 29-1.

Of their $142,140 total itemized deductions, the Willows can deduct only
$138,730 ($142,140 - $3,410). They enter $138,730 on Schedule A (Form
1040), line 28.

Table 29-1. Itemized Deductions Worksheet有ine 28Keep for your records
1. 	Enter the total of the amounts from Schedule A, lines 4, 9, 14, 18, 19,
26, and 27. 	1. 	142,140
2. 	Enter the total of the amounts from Schedule A, lines 4, 13, 15b, and
19, plus any gambling and casualty or theft losses included on line 27. 
2. 	41,000
  	
Caution
	Be sure your total gambling and casualty or theft losses are clearly
identified on the dotted lines next to line 27. 	  	 
3. 	Is the amount on line 2 less than the amount on line 1? 	  	  	  	 
  	
check box
No. 	
Stop reading here. This doen't apply to you
	Your deduction is not limited. Enter the amount from line 1 above on
Schedule A, line 28. 	  	 
  	
Check Box
Yes. 	Subtract line 2 from line 1 	3. 	101,140
4. 	Multiply line 3 by 80% (.80) 	4. 	80,912 	  	 
5. 	Enter the amount from Form 1040, line 38 	5. 	259,600 	  	 
6. 	Enter: $145,950 ($72,975 if married filing separately) 	6. 	145,950 	  	 
7. 	Is the amount on line 6 less than the amount on line 5? 	  	  	  	 
  	
check box
No. 	
Stop reading here. This doen't apply to you
	Your deduction is not limited. Enter the amount from line 1 above on
Schedule A, line 28. 	  	  	  	 
  	
Check Box
Yes. 	Subtract line 6 from line 5 	7. 	113,650 	  	 
8. 	Multiply line 7 by 3% (.03) 	8. 	3,410 	  	 
9. 	Enter the smaller of line 4 or line 8 	9. 	3,410
10. 	Total itemized deductions. Subtract line 9 from line 1. Enter the
result here and on Schedule A,
line 28 	10. 	138,730