Taxpayers with adjusted gross income above a certain amount may lose part of their deduction for personal exemptions and itemized deductions. The provision began in the early 1990's and is set to be repealed in 2010. The itemized deduction reduction originally called for reducing your itemized deductions by 3% of the amount that your AGI exceeds the threshold amount.

Beginning in 2006, the overall limit on certain itemized deductions was gradually eliminated. Under this phaseout rule, the limit on itemized deductions was reduced by one-third in 2006 and will be reduced by one-third in 2007 so that the 3% phaseout is reduced to 2%. In 2008 and 2009, the 3% phaseout will be reduced to 1%. The reduction will be eliminated in 2010.

For 2007, the amount you can claim as a deduction for exemptions is reduced once your adjusted gross income (AGI) goes above a certain level for your filing status. The threshold is indexed annually for inflation.

These levels are as follows:

Married filing separately - $117,300. Single - $156,400. Head of household -$195,500. Married filing jointly - $234,600. Qualifying widow(er) - $234,600

You must reduce the dollar amount of your exemptions by 2% for each $2,500, or part of $2,500 ($1,250 if you are married filing separately), that your AGI exceeds the amount shown above your filing status. However, you can lose no more than 2/3 of the dollar amount of your exceptions. In other words, each exemption cannot be reduced to less than $1,133.

You may ask, "Am I subject to this limit?" The IRS deems you subject to the limit on certain itemized deductions if your adjusted gross income (AGI) is more than $156,400 ($78,200 if you are married filing separately). Your AGI is the amount on Form 1040, line 38.

The following deductions are subject to the overall limit on itemized deductions:

1. Taxes 2) Interest paid 3) Gifts to charity 4) Job expenses and certain miscellaneous deductions 5) Other miscellaneous deductions (excluding gambling and casualty or theft losses)

The following deductions are NOT subject to the overall limit on itemized deductions:

1. Medical and dental expenses 2) Investment interest expense 3) Casualty and theft losses from personal use property 4) Casualty and theft losses from income-producing property 5) Gambling losses

You can use the Itemized Deduction Worksheet in the instructions for Schedule A (Form 1040) to figure your limit. You will enter the result on Schedule A (Form 1040).

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 Form 1040, line 40.