February 8, 2013

The Limitation on Itemized Deductions – It’s Baaaakkk

By Leo Berg, Senior Accountant, Alternative Investment Group

The Limitation on Itemized Deductions – It’s Baaaakkk

The American Taxpayer Relief Act of 2012 (ATRA) brought back the overall limitation on itemized deductions. Higher-income individuals will be subject to a phase-out of a portion of their itemized deductions for tax years beginning after December 31, 2012.

Developing legislation that moves the U.S. towards a balanced federal budget was a mandate of congress when passing ATRA. Bringing back the limitation on itemized deductions is anticipated to increase government revenues by more than $123 billion dollars over the next ten years.

The limitation on Itemized Deductions (known as the “Pease limitation”) reduces most itemized deductions by 3 percent of the amount by which adjusted gross income (AGI) exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions. While the limitation was repealed for 2010, 2011 and 2012, this limitation returns in the law for tax years beginning in 2013.

The 2013 AGI threshold amounts are:

  • $300,000 for married couples and surviving spouses
  • $275,000 for heads of households
  • $250,000 for unmarried taxpayers
  • $150,000 for married taxpayers filing separately

For tax years after 2013, each of these thresholds will be increased by the cost of living adjustment.

If an individual’s adjusted gross income (AGI) exceeds the above thresholds the amount of the itemized deductions for the tax year are reduced by the lesser of:

  • 3% of the excess AGI over the applicable amount, or
  • 80% of the amount of itemized deductions otherwise allowable for the tax year.

The “Pease” limitation does not apply to trust or estates.It is also important to note that deductions for medical expenses, investment interest, casualty and theft losses, or gambling losses are specifically excluded from the limitation.


Q: For the 2013 tax year, Michael and Mary Johnson will file a joint return.They have a combined AGI of $500,000. During the tax year they made $50,000 of cash contributions to their favorite charity and have unreimbursed medical expenses of $25,000 for which they want to claim a deduction.

A: The $500,000 AGI exceeds the applicable amount of $300,000 for married couples. A portion of their itemized deductions will be phased out.(Note that the $25,000 of unreimbursed medical expenses is excluded from the phase out calculation.)The $200,000 excess AGI over the threshold is multiplied by 3% resulting in a $6,000 reduction to total deductible itemized deductions.The $6,000 is compared to 80% of allowable itemized, $50,000, or $40,000. Since $6,000 is the lesser of the two numbers, the taxpayer’s itemized deductions for 2013 are reduced by that amount.


Unfortunately, few ways exist to avoid the Pease limitation in 2013 and beyond.Reducing your AGI by making retirement contributions or putting funds into health savings accounts may help.Spreading deductions over multiple years may also minimize the impact.

If you have any questions related to itemized deduction planning or how this limitation will effect you, contact your Marcum Tax Advisor.