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George Saenz, the Bankrate.com Tax Talk columnistPhaseout of itemized deductions

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

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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 The provision which began in the early 1990s was set to be repealed in 2006 but got somewhat extended until 2009, maybe.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.

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "taxes" as the topic.

Bankrate.com's corrections policy-- Posted: Dec. 6, 2006
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