Depending on a taxpayer’s level of Adjusted Gross Income (“AGI”), the total amount of all the itemized deductions shown on Schedule A of the Form 1040 may not be deductible for Regular Tax purposes – a reduction may apply. For 2009, this AGI level is $166,800 for all taxpayers other than those with the Married Filing Separately status, in which case it is half, or $83,400.
This limitation works in the following manner: from the total of all itemized deductions, one subtracts Medical Expenses, Investment Interest Expense and Casualty Losses – these are not subject to the limitation. From this reduced total an amount that is 1% of the excess of AGI over $166,800 is subtracted. This is the portion of the taxpayer’s itemized deductions for which no Regular Tax benefit is received.
Note that there also is a limitation so that the taxpayer cannot lose more than 2/3 of 80% of the total itemized deductions, but this is rarely encountered.
This wonderfully complicated mechanism is in actuality a hidden tax increase, the apparent brainchild of not-very-well-known former Representative Don Pease of Ohio. This is why it sometimes is referred to as the Pease provision.
Itemized deductions also are disallowed under the AMT, but here a completely different approach is taken. Rather than simply lopping a percentage off the total, the AMT limitations are calculated on an individual deduction-by-deduction basis. For example, state and local taxes are not deductible at all, some interest expense is not deductible, and the medical deduction is subject to a different percentage limitation. With this difference, there is no need for the overall Regular Tax itemized deduction limitation to apply.
As an example, assume a taxpayer has a total of $20,000 in itemized deductions, and that this Regular Tax limitation reduced allowable deductions by $1,000, so that only $19,000 was deductible for the Regular Tax. Since the starting point for calculating the AMT, as shown on Line 1 of IRS Form 6251, is Regular Tax taxable income, this $1,000 adjustment has to be given back. That’s why Line 6 on the Form 6251 is a negative number. After this adjustment is made the individual itemized deduction limitations for the Alternative Minimum Tax are now calculated.
