TAX ADVICE from Julian Block
tax advisor and Larchmont neighbor, Julian Block, provides
help for Gazette readers
Tucked into the Internal Revenue Code is a restriction
on itemized deductions by upper-income individuals – a
curtailment enacted during the senior Bush’s presidency
that flat-taxers like Steve Forbes and Pat Buchanan deride
as yet another one of those devious backdoor increases
that Washington politicians favor.
This restriction reduces the write-off for most itemized
deductions on Schedule A of Form 1040 when AGI, short for
adjusted gross income, tops a specified amount. AGI is the
figure you show at the bottom of Page 1 of Form 1040 after
listing wages and other sources of income and offsetting
income with deductions like outlays for alimony payments
and money moved into traditional IRAs and other retirement
plans and before claiming itemized deductions.
The magic number is indexed, meaning it is automatically
adjusted annually to reflect inflation. For 2003, it is $139,500,
up from 2002’s $137,300. So this year, you forfeit
deductions equal to 3 percent of the amount that AGI exceeds
Put another way, every $1,000 of AGI above $139,500 results
in the loss of $30 of itemized deductions. The $139,500 figure
drops to $69,750 for someone who is married and files a separate
return; that tactic does not raise the threshold for a couple
to a combined $279,000.
The 3-percent percent restriction applies to deductions
for interest on home mortgages, real estate taxes, state
local taxes, charitable contributions,
and miscellaneous expenses (already allowable, in most cases, only for the amount
above two percent of AGI).
While four kinds of write-offs merit reprieves, the exceptions
are for deductions already subject to limitations. The 3-percent
percent rule does not apply to:
(1) medical expenses (deductible only for the amount above 7.5 percent of AGI;
(2) casualty and theft losses (allowable only to the extent such uninsured
losses exceed $100 (for each casualty or theft), plus 10
percent of your AGI); (3) gambling
losses (allowable just to the extent of gambling winnings); and (4) interest
on funds borrowed to finance investments, such as margin accounts used to buy
stocks (allowable just to the extent of investment income, a category that
includes dividends, interest and, subject to restrictions,
EXAMPLE: Abby and Adam Anderson anticipate
an AGI for 2003 of $199,500, and their otherwise allowable
for charitable donations, home-mortgage
interest, real estate taxes and the like aggregate $20,000. So the couple’s
income tops the $139,500 threshold by $60,000, and, as $60,000 times 3 percent
equals $1,800, they are able to deduct just $18,200; they forfeit $1,800.
Abby and Adam suffer the same $1,800 disallowance, whether
their itemized deductions are $20,000 or $100,000; the disallowance
is based on the amount
by which AGI
exceeds $139,500, not the total of itemized deductions. If it is any consolation,
the curtailment cannot cancel more than 80 percent of their deductibles.
They are still allowed to deduct 20 percent.
A 2001 law change authorizes relief for people like the
Andersons, but not right away. It starts a gradual elimination
of the automatic cutback
the job in 2009. And who’s willing to bet the farm that a revenue-hungry
Congress won’t rescind the cancellation? Meanwhile, it stays on the books,
at least through 2009.
Julian Block is a syndicated columnist, attorney and former
IRS investigator who has been cited by the New
York Times as “a leading tax professional” and
by the Wall Street Journal as an “accomplished writer on taxes.” His “Tax
Tips For Freelance Writers” shows how to save truly big money on taxes – legally – and
explains the steps you should take to reduce taxes for this year and even gain
a head start for future years. Send $9.95 for an e-mailed copy or $12.95 (in
the U.S.) for a postpaid copy to: J. Block, 3 Washington Square, #1-G, Larchmont,
NY 10538-2032. Contact him at firstname.lastname@example.org.