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Chapter 30
Limit on itemized deductions

Introduction

The tax law limits the amount of certain itemized deductions that individuals can use to reduce their taxable income. For example, the threshold for deducting medical and dental expenses is 10% of adjusted gross income (AGI) (see chapter 22, Medical and dental expenses), certain miscellaneous deductions are limited to those in excess of 2% of adjusted gross income (see chapter 29, Miscellaneous deductions), and home mortgage interest expense is subject to various limitations (see chapter 24, Interest expense).

Congress has placed an additional “overall” limitation on the deductibility of a certain group of itemized deductions. Itemized deductions that are subject to this limitation include taxes, home mortgage interest, charitable contributions, and most miscellaneous itemized deductions. Medical expenses, casualty and theft losses, investment interest expense, and deductible gambling losses are not subject to this rule.

For 2017, the total of this group of deductions must be reduced by 3% of the amount of your adjusted gross income in excess of $261,500 for individual filers, $287,650 for heads of households, $313,800 if married filing jointly or a surviving spouse, and $156,900 if married filing separately. This limitation is applied after you have used any other limitations that exist in the law, such as the adjusted gross income limitation for charitable contributions and the mortgage interest expense limitations. No more than 80% of the otherwise allowable deductions are phased out. The threshold amounts are indexed annually for inflation.

This chapter discusses the overall limit on itemized deductions on Schedule A (Form 1040). The following topics are included.

Who is subject to the limit.
Which itemized deductions are limited.
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 $313,800 if married filing jointly or qualifying widow(er), $287,650 if head of household, $261,500 if single, or $156,900 if 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 paid—line 9.
Interest paid—lines 10, 11, 12, and 13.
Gifts to charity—line 19.
Job expenses and certain miscellaneous deductions—line 27.
Other miscellaneous deductions—line 28, 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—line 4.
Investment interest expense—line 14.
Casualty and theft losses of personal use property—line 20.
Casualty and theft losses of income-producing property—line 28.
Gambling losses—included on line 28.

EXPLANATION

Whether a particular deduction will be limited or not depends on the character of the deduction.

Example 1

Martin and Judy file a joint income tax return in 2017. They have an adjusted gross income of $452,500. Their only itemized deductions are $20,000 of home mortgage interest and $8,000 of real estate taxes. Because both of these itemized deductions are subject to the limitation, their total deductions of $28,000 must be reduced by 3% of $138,700 (the amount by which AGI exceeds $313,800), or $4,161. They may reduce their taxable income by total itemized deductions of $23,839 ($28,000 − $4,161).

Example 2

Assume the same facts as above, except that Martin and Judy live in a downtown apartment, and their only itemized deduction is $28,000 of otherwise allowable investment interest expense. Because investment interest expense is not subject to the 3% limitation, the entire $28,000 will be deductible.

How Do You Figure the Limit?

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

80% of your itemized deductions that are subject to the overall limit. See Which Itemized Deductions Are Limited, earlier, or
3% of the amount by which your AGI exceeds $313,800 if married filing jointly or qualifying widow(er), $287,650 if head of household, $261,500 if single, or $156,900 if married filing separately.

Before you figure the overall limit on itemized deductions, you first must complete Schedule A (Form 1040), lines 1 through 28, 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 25), the limit on certain meal and entertainment expenses (chapter 27), and the 2%-of-adjusted-gross-income limit on certain miscellaneous deductions (chapter 29).

Itemized Deductions Worksheet. After you have completed Schedule A (Form 1040) through line 28, 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 29. Keep the worksheet for your records.

Example

For tax year 2017, Bill and Terry Willow are filing a joint return on Form 1040. Their adjusted gross income on line 38 is $328,000. Their Schedule A itemized deductions are as follows:

Taxes paid—line 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$ 17,900
Interest paid—lines 10, 11, 12, and 13 . . . . . . . . . . . . . . . . . .	45,000
Investment interest expense—line 14 . . . . . . . . . . . . . . . . . . .	41,000
Gifts to charity—line 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21,000
Job expenses—line 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17,240
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$142,140

The Willows’ investment interest expense deduction ($41,000 from Schedule A (Form 1040), line 14) 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. Of their $142,140 total itemized deductions, the Willows can deduct only $141,714 ($142,140 – $426). They enter $141,714 on Schedule A (Form 1040), line 29.

TAXPLANNER

Calculating the 3% limitation. In certain situations, it is possible for the 3% limitation to reduce allowable itemized deductions below the standard deduction amount. You should consider this possibility when you are choosing whether to itemize your deductions or to use the standard deduction.

Example

Arthur and Karen White have adjusted gross income of $383,000. They have no mortgage on their home; however, they pay annual real estate taxes of $9,500. Each year they contribute $3,500 to their favorite charity. The Whites would compute their taxable income as follows:

Adjusted gross income	$383,000
Itemized deductions
Real estate taxes	$9,500
Charitable contributions	3,500
Total	$13,000
Less 3% of AGI in excess of $313,800	2,076
Allowable itemized deductions	$10,924
Standard deduction if married, filing a joint return	$12,700
Greater of standard deduction or allowable itemized deductions	(12,700)
Personal Exemptions	(3,564)
Taxable Income	$366,736

Note: Their personal exemptions have been reduced according to the phaseout rules discussed in chapter 3, Personal exemptions and dependents.

TAXPLANNER

Bunching. If your itemized deductions are subject to this 3% limitation, you may want to consider a technique called “bunching.” Bunching is effective if you are able to accumulate deductions so that they are high in one year and low in the next. Bunching your itemized deductions so that they are higher in one year can help you take advantage of those itemized deductions if the limitation would normally cause the standard deduction to be higher.

Example

Assume the same facts as in the previous example. This time, however, Arthur and Karen White are able to postpone payment of their 2017 real estate taxes until January 2018, and they can also pay $2,500 of their $3,500 charitable contributions in early 2018. Then next year, in December 2018, they will accelerate these payments to make sure that they fall in 2018 and not 2019. The Whites will end up with the following expenses for 2017 and 2018:

	2017	2018
2017 Real estate taxes	—	$9,500
2017 Charitable contributions	1,000	2,500
2018 Real estate taxes	—	$9,500
2018 Charitable contributions	—	3,500
Total	$1,000	$25,000

By bunching the expenses, the Whites may use the $12,700 standard deduction in 2017 and itemized deductions of $22,924 ($25,000 less the 3% limit of $2,076) in 2018. Total deductions equal $35,624 for the two years ($12,700 + $22,924). In 2018, they will have reduced their taxable income by an additional $10,224 ($22,924 − $12,700). Without bunching, the Whites would have been limited to the standard deduction in each year. (The calculations in this example assume that the standard deduction and the itemized deduction limit will not change in 2018.)

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Table of Contents for Chapter 30: Limit on itemized deductions

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Useful Items

Are You Subject to the Limit?

Which Itemized Deductions Are Limited?

Which Itemized Deductions Are Not Limited?

How Do You Figure the Limit?

Example

Table of Contents for
Chapter 30: Limit on itemized deductions