Phase-out of itemized deductions and personal exemptions

Beginning Jan. 1, 2013, taxpayers could be subject to a phase-out of itemized deductions and personal exemptions unless additional legislation is passed. When the current tax provisions expire, there will be a three percent reduction in itemized deductions for every $2,500 in income over the adjusted gross income (AGI) thresholds. Although the 2013 thresholds have not yet been determined, the amounts will be adjusted for inflation from those in 2009 ($166,800 for single taxpayers and those married filing jointly). Keep in mind that this was the last year the limitations were in place as they have been completely eliminated since 2010. The phase-out limits would be capped at 80 percent of total itemized deductions and apply to all itemized deductions except for medical expenses, investment interest, and casualty and theft losses.

Currently there are no income limitations on the amount of personal exemptions a taxpayer can claim. However, in 2013, phase-out of the personal exemption deduction is scheduled to return. This deduction will be reduced by two percent for every $2,500 in excess of the AGI threshold amounts. Although not yet announced for 2013, these will be adjusted for inflation from the 2009 amounts, which began at $166,800 for single filers and $250,200 for those married filing jointly. There is no limit on this phase-out, so taxpayers can lose their entire deduction.

In most cases, taxpayers will want to accelerate their itemized deductions if they will be subject to the phase-out. This could mean making more charitable contributions or an extra mortgage payment in 2012. If taxpayers will not exceed the threshold, it might be better to hold their deductions until 2013 since they could be subject to higher tax rates and would otherwise benefit from another deduction.


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