Most so-called experts say that regardless of who wins the election, President Obama, or Governor Romney, itemized deductions will be receiving an overhaul. These two gentlemen have very different views about how they will deal with itemized deductions, but both of them believe the itemized deductions should be limited. President Obama says he will not eliminate deductions from mortgage interest, state and local taxes, and donations to charity. However, he says he will limit them in two ways. First, Obama says that he would limit all of these deductions by 3% of the amount, by which adjusted gross income is greater than $250,000 for married couples, $225,000 for head of household, or $200,000 for single folks, and $125,000 for married filing separate. Also, this reduction could not be greater than 80% of itemized deductions.
Secondly, he would also reduce the amount of itemized deductions for those with high incomes, but remain after applying the 3% reduction set forth above. The tax value of itemization would be limited to 28% beginning in 2013. Additionally, the President is proposing to increase tax brackets to 36% and 39.6%.
The effect of both of these is the taxpayers brackets above 28% would end up paying an extra tax, which could be as high as 11.6% of their deductions.
Governor Romney is tackling the problem in a different way. He says he would put a cap on itemized deductions, although, we do not have a detailed a proposal yet. He talked about potentially limiting itemized deductions to $17,000. He has also floated the idea of putting that limit at $25,000. The outcome of this is less clear because the exact deduction limit depends on his proposed tax plan. He is proposing to reduce marginal tax rates by 20% across the board. The current tax rates are 10% to 35%. Under Romney they will be 8% to 28%.