Itemized Deductions Limit Changes

Right off the bat, those of you who have never itemized, try as hard as you can to keep up with the information that is about to spew your direction. Itemized deductions can be a confusing subject to begin with. If you are looking into itemizing this year for the first time, I wish you luck in your efforts and remember, I am here to help.

The pub 17 dos not say when or if all itemized deductions will not have a limit in the future however, under the phase-out rule, the limit on itemized deductions is reduced by one-third for 2006. The deductions that are being affected this year are:

Line 9; Taxes paid

Lines 10, 11 and 12; Interest paid

Line 18; Gifts to charity

Line 26; Job expenses and certain miscellaneous deductions

Line 27; Other miscellaneous deductions (excluding gambling and casualty or theft losses)

"Lines" refer to the lines on the federal tax form 1040.

You are subject to these limits if your adjustable gross income (AGI) is above $150,000 ($75,000 if married filing separately). This is an increase over last years AGI limits of $145,950 ($72,975 MFS). Your' AGI is the amount on line 38 of your 1040 tax return.

What that means for those under $150,000 ($75,000 MFS) is that the medical expenses deduction is the only limit, which is the same for everyone, 7.5% of your AGI. For example, if your AGI is $40,000, 7.5% is $3,000. Say you paid $5,500 in medical expenses you can only claim $2,500. You must subtract 7.5% of your AGI from your medical expenses.

For some people, that's a pretty good stretch. However for others, this can turn out to be a very large deduction.

Now were going to go over how to figure the limit on those certain itemized deductions. So if need to take a break, now is a good time. O.K. if your itemized deductions are subject to the limit, the total of all itemized deductions is reduced by the smaller of the following reduced by one-third:

1.) 80% of your itemized deduction that are affected by the limit. Refer to the list of deductions with a limit.

2.) 3% of the amount by which your AGI exceeds $150,000 ($75,000 MFS).

Now in order to figure the overall limit on your itemized deductions, you must complete lines 1 through 27 of your Schedule A, including any related forms. Then figure in any other limits on allowances to your deductions (Meal/Entertainment expenses and Charitable Contributions). After these two steps have been completed, refer to the Itemized Deductions Worksheet located in the Schedule A instructions.

Once you have completed the task of figuring what you can actually claim as itemized deductions, compare this number with what your standard deduction is. Sometimes the standard is the larger number.

You obviously want to use the larger number when claiming deductions. This is where the goal of increasing your itemized deductions can become very lucrative.

General Sales Tax is no longer an itemizable deduction. We can no longer elect to deduct state and local general sales tax instead of state and local income taxes as a deduction within our itemized deductions.

For those of you, such as I, that likes to keep all of your receipts to claim a higher General Sales Tax than the standard allows, I feel our pain. With a little strength, I think we can get through it.

Congress was considering legislation that would extend the deduction for state and local sales tax. To find out if this legislation was enacted go to (www.) irs.gov, click forms and publications and then click what's hot. Or type publication 553 (Highlights of 2006 Tax Changes) in the sites' search engine.

And as always, refer to the IRS website or the Publication 17 with all of you tax questions. If that doesn't work, give me a shout and I'll do my best to help you out. Until next time, thanks and have a great day.