Prepare for the 2013 ”automatic” tax law rollback. The fuse is lit and it continues to burn with a potential “explosion” in tax law changes at the end of 2012. If you wait until the end of the year to plan for these changes it may be too late. Over the course of 2012 a number of tax tips will be provided to help become aware of the possible changes.
Itemized deductions and personal exemptions are common benefits within the tax code that reduce your taxable income. Prior to 2010, there were provisions to phase-out these tax reduction benefits for those whose income surpassed certain thresholds. After 2012, unless Congress acts, your itemized deductions and personal exemptions may once again be phased-out.
Itemized Deduction Phaseout Background
The phase-outs were triggered in 2009 when your Adjusted Gross Income (AGI) exceeded the following amounts:
The phase-out of itemized deductions calculations:
1. Personal Exemptions. Each personal exemption was reduced by 2% for each $2,500 by which your AGI exceeded the threshold amount until the benefit of all personal exemptions was eliminated.
2. Itemized Deductions. Your itemized deductions were generally reduced by 3% of the excess of your AGI over the $166,800 (or $83,400) threshold amount until up to 80% of your allowable itemized deductions were eliminated. Medical expenses, investment interest, theft losses, gambling losses, and casualty losses were not subject to the phase-out rule.
Action to take now
- Review your most recent tax return and see if you may be impacted by the itemized deduction and personal exemption phase-outs. If so, then calculate the possible impact on next year’s taxes and start to save for the possible drop in take home pay.
- Check your state income tax return as well. In many states, like Minnesota, the phase-out of Federal itemized deductions and personal exemptions were quietly phased back in creating quite a tax surprise for its citizens.
- If you currently are unmarried and have dependents, double check the best way to file to minimize the impact of the possible phase-outs.
Is there any good news?
Perhaps. During 2009 much of the phase-outs had been phased out. There is always the possibility that Congress will act and change or extend the current tax law. But if Congress does nothing the phase-outs that were phased out will be back with a vengeance in 2013.