There is a 3% itemized deduction reduction and you should take this into account
before deciding to earn extra income above certain limits.As much as 80% of the
tax benefits of your itemized deductions may be lost if your Adjusted Gross
Income (AGI) exceeds $166,800 (for
married individuals filing separate tax returns the threshold is $83,400) in
2009. Itemized
deductions that otherwise would have been allowed on your tax return (excluding medical expenses, casualty
and theft losses, and investment interest expense) are reduced by 3% of the amount
by which your AGI, including capital gains, exceeds the above threshold. The amount that
your itemized deductions can be reduced on your tax return is capped at 80%.
So, if you have an AGI of $366,800 which is $200,000 over the
itemized deduction reduction threshold in 2009 and
itemized deductions of $55,000, your itemized deductions are reduced by $6,000 (3% of
$200,000) to $49,000 on your tax return. Put another way, your taxable income increases $6,000, and your tax
increases $2,100 (35% of $6,000) on your tax return.
The disallowance of itemized deductions is applied after taking into account other
limitations, such as the 2% floor for miscellaneous itemized deductions on
your tax return.
Your Federal Income Tax.
