If your itemized deductions are subject to the limit, the total of all your itemized deductions is reduced by the smaller of:

1. 3% of the amount by which your AGI exceeds $124,500 ($62,250 if married filing separately), or
2. 80% of your itemized deductions that are affected by the limit. See Which Deductions Are Limited?, earlier.

Before you figure the overall limit on itemized deductions, you must first complete lines 1 through 27 of Schedule A (Form 1040), including any appropriate forms (such as Form 2106, Form 4684, etc.).

The overall limit on itemized deductions is figured after you have applied any other limit on the allowance of any itemized deduction. Other limits figured first include charitable contribution limits (chapter 26), the limit on certain meals and entertainment (chapter 28), and the 2%-of-AGI limit on certain miscellaneous deductions (chapter 30).

Itemized Deductions Worksheet. After you have completed Schedule A (Form 1040) through line 27, you can use the Itemized Deductions Worksheet in the Instructions for Form 1040 to figure your limit. Enter the result on line 28 of Schedule A (Form 1040). Keep the worksheet for your records.

You should compare the amount of your standard deduction to the amount of your itemized deductions after applying the limit. Use the greater amount when completing line 36 of your Form 1040. See chapter 21 for information on how to figure your standard deduction.

Example

For tax year 1998, Bill and Terry Willow are filing a joint return on Form 1040 and have adjusted gross income of $255,250. Their Schedule A itemized deductions consist of the following:

State income and real estate taxes	$17,900
Home mortgage interest	45,000
Charitable contributions	21,000
Investment interest expense	41,000
Miscellaneous deductions	17,240
Total	$142,140

The Willows' investment interest expense is not subject to the overall limit on itemized deductions. Their deduction for miscellaneous deductions is the total after applying the 2%-of-AGI limit and does not include any gambling losses.

The Willows figure their overall limit as follows:

Itemized Deductions Worksheet
Line 28 (Schedule A)
(Keep for your records)

1.	Add the amounts on Schedule A, lines 4, 9, 14, 18, 19, 26, and 27		$142,140
2.	Add the amounts on Schedule A, lines 4, 13, and 19, plus any gambling losses included on line 27		41,000
3.	Subtract line 2 from line 1. (If the result is zero, stop here; enter the amount from line 1 above on Schedule A, line 28.)		101,140
4.	Multiply the amount on line 3 by 80% (.80)	80,912
5.	Enter the amount from Form 1040, line 33	255,250
6.	Enter $124,500 ($62,250 if married filing separately)	124,500
7.	Subtract line 6 from line 5. (If the result is zero or less, stop here; enter the amount from line 1 above on Schedule A, line 28.)	130,750
8.	Multiply the amount on line 7 by 3% (.03)	3,923
9.	Enter the smaller of line 4 or line 8		3,923
10.	Total itemized deductions. Subtract line 9 from line 1. Enter the result here and on Schedule A, line 28		$138,217

Of their $142,140 total itemized deductions, the Willows can deduct only $138,217. They enter $138,217 on Schedule A, line 28.

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