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Many people think, regardless of their income, that itemized deductions will always help reduce their taxes. They cling to their itemized deductions as tightly as Linus clung to his blanket in the Peanuts comic strip.
Well, I'm here to tell you that you might not get as much "bang for the buck" from those itemized deductions if your income is above certain levels. This is simply another method Uncle Sammy uses to generate more tax revenue without raising the tax rates.
There is a section in the tax code that limits the amount of itemized deductions allowed to certain "highincome" taxpayers. The limit will apply to you (regardless of whether you believe you're a "highincome" taxpayer or not) if your adjusted gross income (AGI) exceeds $128,950 ($64,475 for a separate return filed by a married individual) for tax year 2000. The good news is that this AGI limitation is "indexed" for inflation each year. So, while the AGI limitation is $128,950 for 2000, it'll be a bit higher for 2001 ($132,950, in fact).
Anyway, if you're subject to this limitation, you're required to reduce the overall amount of your allowable itemized deductions by the lesser of:
 3% of the excess of adjusted gross income over the applicable amount or
 80% of the amount of otherwise allowable itemized deductions
Deductions subject to the overall limit:
 Taxes paid
 Interest (except investment interest)
 Charitable contributions
 Job expenses
 Most miscellaneous deductions
 Medical (and dental) expenses
 Investment interest expense
 Nonbusiness casualty and theft loss
 Gambling loss (to the extent of gambling winnings)
Example 1: Carole, Swami to the stars, has an AGI of $40,000. Her floor for miscellaneous deductions is 2%. This means that she can only deduct qualifying items that exceed 2% of $40,000, or $800. If she has $700 in miscellaneous deductions, she's out of luck. If she has $900 in miscellaneous deductions, she can deduct $100  the amount by which the deductions exceed the floor.
As you can see, the hurdle is higher for medical deductions. Carole will only be able to deduct medical expenses that exceed 7.5% of her AGI  in her case, $3,000.
But, the "overall" limits for highincome taxpayers discussed above are in addition to any specific floors for medical deductions or miscellaneous itemized deductions.
Example 2: Let's look at a brand new example for Carole. Let's assume Carole is still single, but her AGI is much higher  $175,000 for 2000  and Carole has the following itemized deductions:
Medical (after the 7.5% floor, which means that she has $15,625 in total medical expenses, but only the excess over her 7.5% AGI floor will be deductible): $2,500
Taxes: $3,100
Home Mortgage Interest: $19,500
Investment Interest: $1,200
Charity: $4,000
Miscellaneous Itemized Deductions (after the 2% floor, which means that she has $4,000 in total miscellaneous deductions, but only the excess over her 2% floor will be deductible): $500
You might think that Carole's total itemized deductions would amount to $30,800  the grand total of all of the itemized deductions noted above. And, sadly, you would be very wrong. Because Carole is deemed a "highincome" taxpayer, with AGI greater than $128,950 for 2000, her itemized deductions will be limited. How can Carole determine how many of her itemized deductions will be snatched from her? Well, she can use this formula (and so can you, if you think that your AGI will be above the limitation noted):
 Add your total itemized deductions. In Carole's case, that would be $30,800.
 Add your itemized deductions for Medical, Investment Interest, Casualty Losses, and any Gambling Losses. For Carole, this would amount to $3,700 ($2,500 for Medical and $1,200 for Investment Interest).
 Subtract line #2 from line #1. For Carole, this would be $27,100.
 Multiply the result you got in line #3 by 0.8 to find 80% of the total. Carole's computation would give a result of $21,680.
 Note your Adjusted Gross Income. Carole's AGI is $175,000.
 Note the AGI limitation. As we told you above, the AGI limitation for 2000 is $128,950, which is the year we're using for this example. (The limit is indexed for inflation, so it will change from year to year. For 2001, the limit is $132,950.)
 Subtract line #6 from line #5 to determine how much your AGI exceeds the limitation amount. This gives Carole a result of $46,050.
 Multiply line #7 by 0.03 to find 3% of the result. Carole's result is $1,382.
 Enter the SMALLER of line #4 or line #8. For Carole, line #8 is smaller, so she enters $1,382.
 Subtract line #9 from line #1. For Carole, this gives her a result of $29,418. This is the ALLOWABLE amount of all of Carole's itemized deductions for 2000.
The bad news just keeps on coming: many states also similarly limit itemized deductions for "highincome" taxpayers. So, Carole also could be slapped around by her state tax agency. Ouch!
And, when we say the itemized deductions are lost, we mean lost. There are no provisions to carry these "lost" deductions over to any future or previous tax years. They are simply gone forever  just like you never had the deduction. Many veryhighincome individuals can see their itemized deductions slashed by as much as 80%. Others, such as Carole, will just get a punch to the kidney.
What could Carole have done to avoid this? About the only thing possible would have been to control her income to remain under the $128,950 limitation. For many of you, this might be possible. For other folks who realize a large portion of their AGI in wages or other "fixed" income, it may simply be impossible. And, for those unfortunate taxpayers, all they can really do is search for a large bullet to bite.
So, if your AGI is above the limit, you'll lose your grip on some of your itemized deductions. Don't be caught by surprise. The information for these limits can be found in the instructions for Form 1040, line 28.