What is the itemized deduction reduction?
Higher income taxpayers must reduce their itemized deductions by the lesser of 3 percent of the amount by which their income exceeds a certain amount – $250,000 for individuals, $275,000 for heads of households and $300,000 for married couples filing jointly.
These taxpayers can lose up to 80 percent of the value of their deductions because most itemized deductions have to be reduced by 3 percent of the amount by which the taxpayer’s income exceeds a certain number, or 80 percent of the taxpayer’s itemized deductions.
Example: A married couple filing jointly has $500,000 in adjusted gross income (AGI) and because their AGI exceeds the $305,050 threshold, the 3 percent reduction applies to this couple’s itemized deductions.
Excess of couple’s AGI over $305,500 = $194,500
3% reduction x 3%
Reduction of itemized deductions $5,835.00
The couple’s itemized deductions will be reduced by the lesser of $5,835 or 80% of the itemized deductions.