 Phaseout
of itemized deductions
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 Dear
Tax Talk,
My wife and I are in process of purchasing our first home
and need help to clarify the amount of mortgage interest tax benefit we would
be entitled to. Our combined income exceeds the $150,000 AGI limit. The mortgage
is a 30-year fixed and the monthly payment is about $5,000. If the amount we are
entitled to deduct is significantly reduced due to the $150,000 limit constraint,
we may decide not to move forward with the purchase. Any data/advice that you
can provide would be helpful.
-- Alan
 Dear
Alan,
You're referring to the phaseout of itemized deductions when (in
2006) your adjusted gross income, or AGI, exceeds $150,500 (married
and single taxpayers). The provision which began in the early 1990s
was set to be repealed in 2006 but got somewhat extended until 2009,
maybe. The provision calls for reducing your itemized deductions
by 3 percent of the amount that your AGI exceeds the threshold amount.
The threshold is indexed annually for inflation; thus
the odd amount of $150,500 in 2006. The repeal would have been nice,
but now the repeal is phased in. In 2006 and 2007 you basically
have a 2 percent reduction of itemized deductions and in 2008 and
2009, a 1 percent reduction.
What this means is that if in 2006 your AGI is $250,500,
your itemized deductions will be reduced by $2,000. A married couple
at that level of income is in the 33 percent tax bracket so they
lose out on $660 in tax savings as a result of the reduction to
itemized deductions. The reduction is a function of your income
and not the amount of itemized deductions. So whether you have $20,000
or $50,000 in itemized deductions, your tax cost is the same. Hence
the reduction should not be a factor in determining the size of
your mortgage payment or whether you go forward with this purchase.
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