Phaseout of limit on itemized deductions. Beginning in 2006, the overall limit on certain itemized deductions will gradually be eliminated. Under this phaseout rule, the limit on itemized deductions is reduced by one-third for 2006.

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

You are subject to the limit on certain itemized deductions if your adjusted gross income (AGI) is more than $150,500 ($75,250 if you are married filing separately). Your AGI is the amount on Form 1040, line 38.

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

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.

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:

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 meal and entertainment expenses (chapter 26), and the 2%-of- adjusted-gross-income limit on certain miscellaneous deductions (chapter 28).

Example

For tax year 2006, 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 paid—line 9		$17,900
Interest paid—lines 10, 11, and 12		45,000
Investment interest expense —line 13		41,000
Gifts to charity—line 18		21,000
Job expenses—line 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 $139,958 ($142,140 - $2,182). They enter $139,958 on Schedule A (Form 1040), line 28.

Table 29-1. Itemized Deductions Worksheet—Line 28

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, and 19, plus any gambling and casualty or theft losses included on line 27.					2.	41,000
		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?
	No.		Your deduction is not limited. Enter the amount from line 1 above on Schedule A, line 28.
	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: $150,500 ($75,250 if married filing separately)			6.	150,500
7.	Is the amount on line 6 less than the amount on line 5?
	No.		Your deduction is not limited. Enter the amount from line 1 above on Schedule A, line 28.
	Yes.	Subtract line 6 from line 5		7.	109,100
8.	Multiply line 7 by 3% (.03)			8.	3,273
9.	Enter the smaller of line 4 or line 8					9.	3,273
10.	Divide line 9 by 3					10.	1,091
11.	Subtract line 10 from line 9					11.	2,182
12.	Total itemized deductions. Subtract line 11 from line 1. Enter the result here and on Schedule A, line 28					12.	139,958