Itemized deductions are a taxpayer’s best friend if the itemized deduction amount greatly exceeds the standard deduction amount as it reduces the amount of taxable income. The IRS has a list of allowable deductions including mortgage interest property taxes medical expenses charity etc. that can greatly reduce the income that can be taxed.
If the Bush Tax Cuts end on December 31 2012 the allowable amount of itemized deductions will be reduced for higher income taxpayers.
The Current Law:
As the law stands now the amount of itemized deductions is not limited or based on the taxpayer’s income. As long as the taxpayer has kept receipts and records to prove the expense they can deduct that from taxable income.
How the Change Affects you:
If the Bush Tax Cuts are not extended at the end of 2012 there will be a limitation of the amount of itemized deductions based on the taxpayer’s income. There will be a 3% phase-out of itemized deductions for those whose income exceeds the threshold amount. However the limitation amount will not exceed 80% of the total itemized deductions.
How to Plan for the Change:
Taxpayers filing as single and whose income exceeds $173650 and taxpayers filing as married whose income exceeds $260500 will be the most affected by this change. Individuals may want to be ready to increase their withholding or make larger estimated tax payments in 2013 to avoid any adverse impact.