2014 Itemized Deduction Phase Out

For 2010 – 2012, higher-income tax payers were not subject to this reduction based on Adjusted Gross Income, as they were in 2009 and earlier years.

In 2013 the itemized deduction phase out rule was brought back. The itemized deduction phase out rule is similar to the phaseout provision that applied before 2006 but the new rule applies at considerably higher income thresholds, so fewer taxpayers are affected.

If your 2014 adjusted gross income (AGI) exceeds your threshold amount (found below), some of your itemized deductions are disallowed. The balance of your itemized deductions are generally reduced by 3% of the excess of your AGI over your threshold amount. This is known as the “3% Itemized Deduction Reduction” or “Itemized Deduction Phase Out” rule. There are deductions that are not subject to the 3% itemized deduction phase out rule. These include medical expenses, investment interest, theft losses, gambling losses, and casualty losses.

Prior Itemized Deduction Phase Out Limit
Beginning in 2006, the overall limit on certain itemized deductions was gradually eliminated. Under this phaseout rule, the limit on itemized deductions was reduced by one-third for 2006. These reductions were continued until 2009. For 2008 and 2009, only one-third of the amount that would have been disallowed under the pre-2006 rules were in fact be disallowed. The reduction rules were completely phased out in 2010 and were brought back in 2013.

Itemized Deduction Phaseout in 2014

For 2014, the disallowance rule may apply if your 2014 adjusted gross income (AGI) exceeds the amounts below. These are your threshold amounts:

  • $305,050 if you are married filing jointly or a qualifying widow/widower
  • $279,650 if a head of household
  • $254,200 if single
  • $152,525 if married filing separately

How To Figure the Phaseout Limit for 2014

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

  • 80% of your itemized deductions that are affected by the limit.
  • 3% of the amount by which your AGI exceeds your AGI found above.

If you AGI is very high, the 3% reduction applies until 80% of the deductions are eliminated. In other words, the reduction cannot exceed 80% of allowable itemized deductions.

Example: Darrell is single and his 2014 adjusted gross income is $320,050. Darrell has $31,000 of itemized expenses as shown below:

Real estate taxes $7,000
Home mortgage interest$20,000
Investment interest $4,000
Total $31,000

All of Darrell’s deductions except investment interest are subject to the 3% itemized deduction phaseout.

Darrell’s allowable deduction would be determined as follows:

1. AGI $ 320,050
3% Threshold ($254,200)
Excess income $65,850
3% of Excess (65,850 x .03) $1,975.50
2. Itemized deductions $31,000
80% of expenses (18,000 X .80)$24,800
Itemized deductions subject to 3% phaseout $6,200.00
Smaller of (1) or (2) $1,975.50
5. Net itemized deductions allowable ($31,000 - 1,975.50)$29,024.50

The smaller of the two calculations above is disallowed from deduction. In this case calculation 1 is $1,975.50 and calculation 2 is $6,200. Calculation 1 would be “phased out” of Darrell’s deduction. Thus, Darrell would be allowed to deduct $ 29,024.50 ($ 31,000 total deductions – $1975.50 itemized deduction phaseout amount) from his income.

You can see the 3% itemized deductions worksheet here

Itemized Deduction Phase Out Deductions

The following are subject to the disallowance rule if your AGI exceeds the threshold amount.

Note that the disallowance for itemized deductions is applied after taking into account other limitations, such as the 2% floor for miscellaneous itemized deductions or the 7.5% floor on medical expenses, on your tax return. Since there are outside the scope of this site you should consult a tax accountant or read about them on the IRS website.

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