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AGI

= $237,300

Threshold*

= $137,350

Difference

= $100,000

3% of $100,000

= $3,000

Total deductions

= $6,200

$6,200 x 80%

= $4,960

MAKING APRIL 15TH YOUR FAVORITE DAY

181

Your deductions will be reduced by $3,000. In order for the 80 percent rule to come into play, your AGI would exceed $302,633.

*Based on 2002 tax figures.

are single, head of household, widowed, or married filing jointly. These amounts are annually indexed for inflation, so that each year they increase a little bit.

When the deductions are reduced, they are done so according to the smaller of two limitations. The first limitation is that the deduction will be reduced by 3 percent of the amount that the tax- payer’s AGI exceeds the threshold amount. The second says that the deduction cannot be reduced by more than 80 percent of the allowable itemized deductions. So, for example, in 2002 you file your taxes and itemize your deductions. Your filing status is mar- ried filing jointly, and your AGI is $237,300. The amount by which your deductions will be reduced is $3000, just so long as that number ($3000) isn’t more than 80 percent of your total item- ized deductions.

Medical expenses, investment interest, casualty losses, and wagering losses to the extent of wagering gains are not counted in the phaseout process. So, let’s say that you carry a portfolio on margin (borrowing money from the brokerage house to buy secu- rities), have incurred debt, and are paying interest on that debt. This is categorized as investment interest and would remain fully deductible regardless of what your AGI is. Of course, this is still limited to the extent of your investment income. The important

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