There are several changes in the tax laws for 2013 that will result in higher taxes for some taxpayers – primarily those with substantial incomes. In this post, I will discuss the change relating to the phase-out of personal exemptions. In upcoming posts, I will address other changes.
In general, you are entitled to a personal exemption for yourself, your spouse (if married filing jointly) and each of your dependents. An exemption reduces your taxable income, which results in lower taxes for the year. In 2013, the exemption amount is $3,900. As an example, exemptions for a family of four would equal $15,600 ($3,900 x 4).
In prior tax years (2010 to 2012), a taxpayer always received the full amount of the exemptions, regardless of his or her Adjusted Gross Income (AGI)*. However, starting in 2013, personal exemptions are subject to phase-out rules based on AGI. What does this mean for you? It depends on your filing status and your Adjusted Gross Income (AGI). If your AGI is below a certain threshold range, you receive the full amount (100%) of your exemptions. If your AGI is within the threshold range, your exemptions will be reduced. If your AGI is above the threshold range, your exemptions will be eliminated.
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*Adjusted Gross Income is gross income minus certain adjustments to income.
Here are the applicable threshold ranges for AGI:
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Married Filing Jointly: $300,000 to $422,500
Qualifying Widow(er): $300,000 to $422,500
Head of Household: $275,000 to $397,500
Single: $250,000 to $372,500
Married Filing Separately: $150,000 to $211,250
How does this work for a family of four with filing status of Married Filing Jointly? If AGI is less than $300,000, the total exemption amount is $15,600 ($3,900 x 4 x 100%). If AGI is more than $422,500, the total exemption amount is $0 ($3,900 x 4 x 0%). If their AGI is within the range, the total exemption amount will be somewhere between $0 and $15,600. For example, if AGI is $362,000, the total exemption is $7,800 ($3,900 x 4 x 50%).
As you can see, the potential impact of the phase-out can be significant. For the family of four, it can result in additional taxable income of as much as $15,600, which could mean an additional tax of $5,460 (at a marginal tax rate of 35%).
Some things to remember…
- This is an overview of this new tax law provision. For complete details, you should refer to IRS Publication 17.
- If the taxpayer is subject to the Alternative Minimum Tax (AMT), the impact of this provision might be reduced or eliminated.
In my next post, I will discuss another potential phase-out relating to your itemized deductions.
As always, please post a comment if you have any general questions and I will be happy to respond. I can also be reached at lencarusi@gmail.com or (203) 807-3263 if you have any specific issues you would like to discuss.
