The Expiration of Bush-era Tax Cuts: Exemption and Deduction Phase-out Thresholds

Beginning in 2013, the expiration of the Bush-era tax cuts brings back the phase-out threshold for personal exemptions and itemized deductions. For tax years 2010 through 2012, taxpayers were allowed their full personal exemption regardless of their adjusted gross income (AGI). Taxpayers also received the full benefit of their itemized deductions.

With the personal exemption phase-out being reinstated, higher income taxpayers will see the value of each personal exemption reduced from its full value by two percent for each $2,500 or portion thereof above specific income thresholds. For married taxpayers filing jointly in 2013, personal exemptions will start to phase out when AGI reaches $261,650 and will be completely phased out when AGI reaches $384,150. For single taxpayers, the personal exemption phase-out starts with AGI at $174,450 and is completely phased out once AGI reaches $296,950.

The limitation on itemized deductions is also scheduled to be revived after 2012. Taxpayer’s itemized deductions will be reduced by three percent of their AGI over the same thresholds as above.

Both phase-outs would increase marginal tax rates for taxpayers in the affected income ranges. The increase due to the personal exemption phase-out would depend on the number of exemptions claimed by the taxpayer. The limitation on itemized deductions would increase the marginal tax rate of affected taxpayers by three percent of their tax bracket rate.

For any questions regarding the sunset of these Bush-era tax cuts, please contact your Anders tax advisor.