Personal Exemption Phaseout

Yesterday, I wrote a post about how your itemized deductions would be reduced if you had income greater than a certain amount.  But itemized deductions are not the only items that are reduced when you meet certain income levels.  Your personal exemptions are also reduced by a certain amount when you reach a certain income level.

As part of the same legislation that gave us the itemized deduction reduction, the Personal Exemption Phaseout (PEP) , the personal exemption will be reduced by two percent for every $2,500 that your adjusted gross income is greater than the threshold for a given filing status.

For 2013, the phaseout of the personal exemption of $3,900 (for 2013) will be over the following income ranges:

Filing Status

Phaseout Starting Point

Phaseout End Point

Single

$250,000

$372,500

Head of Household

$275,000

$397,500

Married Filing Jointly or Qualifying Widow(er)

$300,000

$422,500

Married Filing Separately

$150,000

$211,250

 

So, how does this work?  Let’s take a look at an example with a married couple with three children, who have adjusted gross income of $300,000.  In this example, the personal exemptions would total $19,500.  However, because their income is $50,000 over the phaseout start point, the exemptions would need to be reduced.  $50,000 divided by the aforementioned $2,500 is 20.  Therefore, the exemptions need to be reduced by 40% or $7,800 ($19,500 in total deductions times 40%).  The amount of personal exemptions that the family can claim will be $11,700.

Have you ever run into a situation where your personal exemptions deductions were reduced on your tax return due to income limits?    I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

In accordance with Circular 230 Treasury Department Regulations, I am required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code.  If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.

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