Disappearing Deductions Cost Taxpayers
(CBS MoneyWatch) Changes to tax laws last year reinstated some income-based phase outs of some widely used personal exemptions and itemized deductions, leaving many taxpayers with higher tax bills.
Hardest hit will be those with higher incomes, who will be disappointed to see that deductions they previously claimed on their 2012 tax returns have been reduced or eliminated.
The Personal Exemption Phase Out
Typically tax payers are allowed to claim an exemption for themselves and any other joint filer and dependent on their tax return. The personal exemption is a defined amount – $3,900 for 2013 – which is used to reduce their income before figuring the amount of tax they owe. But starting with 2013 tax returns, single filers with adjusted gross income (AGI) in excess of $250,000 or those who are married filing jointly and have AGI in excess of $300,000 will be subject to a phase out of their personal exemptions.
The phase out of the personal exemption works like this. For every $2,500 of AGI (or portion) above $250,000 ($300,000 for married filing jointly), the $3,900 per-person personal exemption amount is reduced by 2%. For married couples, personal exemptions are fully phased out once their AGI exceeds about $422,000, and for single filers their personal exemptions are phased out when their AGI exceeds about $372,000.
Here is an example of how this might affect a taxpayer:
If you are in the 35 percent federal tax bracket, the loss of each $3,900 personal exemption increases your taxes by $1,365. If you want to know how your tax return is impacted, look at line 42 of Form 1040, to see the amount of the personal exemptions you are allowed to claim on your tax return and compare that to the amount that results by multiplying $3,900 by line six (which is the number of personal exemptions you are allowed to claim.)
You May Also Be Interested In These Stories
- Last Minute Tax Filers Scramble To Meet Midnight Deadline
- Can’t Pay Your Taxes? Here’s What You Can Do
- 7 Deductions That Lower Your Taxable Income
- Bill Could Bring Big Tax Credit To Florida Films