ATRA phaseout taxes

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The American Taxpayers Relief Act (ATRA) imposes phaseouts of itemized deductions (known as Pease limitations) [note 1] and for personal exemption phaseouts (known as PEP) for taxpayers whose adjusted gross incomes surpass threshold levels. The threshold levels are the same for both phaseouts. The thresholds took effect in 2013 and will be adjusted for future inflation.

2017 AGI phaseout thresholds
Filing status AGI threshold
Married filing jointly/surviving spouse $313,800
Head of household $287.650
Single $261,500
Married filing separate $156,900

Pease limitations on itemized deductions

The Pease limitation, revived by the ATRA, reduces the amount of a higher income taxpayer's itemized deductions by 3% of the amount by which the taxpayer's adjusted gross income exceeds an applicable threshold (see above table). The amount of itemized deductions reduced is limited to no more than 80%. Not all itemized deductions are subject to reduction. The following deductible expenses are excluded from the limitation:

  • Medical expenses
  • Investment interest
  • Casualty, theft, or wagering losses. [1]

Most taxpayers subject to the Pease limitation have enough itemized deductions that they take the full reduction; in particular, if they pay state income taxes, 80% of the state income tax alone is likely to be more than 3% of the excess amount. Thus the usual effect of the Pease limitation is to increase the taxpayer's marginal tax rate by about 1%. For example, in the 33% tax bracket, an extra $100 of income increases taxable income by $103, and the tax on $103 is $33.99, for a 33.99% marginal tax rate.

PEP limitations on personal exemption

The ATRA also revives the phaseout on personal exemptions. Under the law, the total exemptions that may be claimed by a taxpayer is reduced 2% for each $2,500 ($1,250 for married filing separate) by which the taxpayer's adjusted gross income exceeds an applicable threshold. [1] For example, the 2017 personal exemption of $4050 will be reduced by 10% to $3645 if the taxpayer is $12,500 above the threshold, and will go away completely if the taxpayer is $125,000 above the threshold. Since every $10,000 of income reduces exemptions by $332 each, and increases the tax bill by $110 in a 33% bracket, the taxpayer's marginal tax rate increases by about 1% per exemption; with four exemptions, the 33% tax bracket becomes about a 37% marginal rate (and 38% with Pease).

Notes

  1. Donald J. Pease, congressman from Ohio, drafted the limitations on itemized deductions which bear his name in 1990. See 26 USC § 68 - Overall limitation on itemized deductions, for the original law.

See also

References

External links