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Could Pease limitations affect your itemized deductions?

On Behalf of | Nov 4, 2016 | Tax Controversies

Almost all higher-income taxpayers itemize deductions on their tax returns. The Massachusetts Department of Revenue reports each year on the number of million-dollar earners in the state.

The Boston Globe reported on the most recent data from the 2014 tax year. There were 15,422 of these households in the state, a 22 percent increase over the 2013. Of course, it does not take a million-plus income to hit certain phase-outs (referred to as Pease limitations) for deductions.

Change to the deduction thresholds for 2017

The standard deduction increases slightly in 2017 to $12,700 for a couple filing jointly. The individual will be $6,350. If you own a home in Massachusetts, the mortgage interest alone may be more than the standard and mean you itemize your deductions.

In 2017, the Pease limitations take effect for deductions over $313,800 for joint filers and $261,500 for individuals. These limitations can reduce your itemized deduction and apply to the following:

  • Charitable giving
  • Mortgage interest
  • State and local taxes

They do not apply to several categories of deductions like medical expenses, investment expenses and theft or casualty losses.

Charitable gifts

Also, consider that you can only deduct gifts up to 50 percent of your adjusted gross income. The way that a large gift to a local museum or alma mater is structured must be considered carefully.

This can happen in many situations. Let’s take an example. You are in retirement and your income is approximately $250,000. If you want to make a large gift to your alma mater – Wellesley College or MIT – of $500,000, your deduction would be limited to $125,000 in a tax year.

You might, however, be able to carry forward the excess donation into the next tax years. The limit is five years to use up the excess. This means you can still make a lump sum gift and take advantage of the donation for several years.

Those with higher incomes are often the target of IRS audits, so take the time to get proper advice. Making a mistake on deductions could lead to back taxes, penalties and interest.


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