Definition
Exemption Phase-Out is a tax provision that reduces the amount taxpayers can claim for personal exemptions as their Adjusted Gross Income (AGI) exceeds certain income levels. This means that as a taxpayer’s income increases and surpasses predefined thresholds, the values of the exemptions gradually decrease until they are completely phased out and no longer available for deduction.
Examples
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Individual Taxpayer: Suppose the phase-out threshold for a single taxpayer is $200,000 AGI. If their AGI is $220,000, the amount they can claim for personal exemptions starts to reduce according to a specific phase-out formula until it reaches zero at a higher income level.
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Married Filing Jointly: A married couple filing jointly with an AGI of $350,000 will experience a faster reduction in personal exemptions if their phase-out threshold begins at $300,000. The exemptions will continue to decrease as their AGI surpasses $300,000.
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Head of Household: If the phase-out threshold for head of household is set at $275,000 AGI, any income earned above this amount will lead to a reduction in the personal exemption values available to the taxpayer.
Frequently Asked Questions
What is the purpose of exemption phase-outs?
The purpose is to limit the tax benefits available to high-income taxpayers, thereby ensuring a more progressive tax system where higher earners contribute a larger share of tax revenue.
At what AGI does the phase-out begin?
The exact AGI threshold at which the phase-out begins can vary annually and depends on the taxpayer’s filing status (e.g., single, married filing jointly, head of household).
How is the phase-out calculated?
Exemption phase-outs are typically calculated using a percentage reduction rate applied to the amount of the exemption, based on how far the taxpayer’s AGI exceeds the threshold.
Does the exemption phase-out apply to all taxpayers?
No, only taxpayers whose AGI exceeds the specific threshold for their filing status are subject to the exemption phase-out.
What are personal exemptions?
Personal exemptions are deductions that taxpayers can claim for themselves, their spouses, and dependents, which reduce their taxable income.
Related Terms
- Adjusted Gross Income (AGI): Total gross income minus specific deductions; AGI is used to determine a taxpayer’s eligibility for certain tax credits and phase-outs.
- Tax Deductions: Reductions from gross income when calculating taxable income, lowering overall tax liability.
- Phase-Out: A gradual reduction of tax benefits, such as deductions or credits, as income increases.
- Personal Exemptions: Specific amounts that can be subtracted from AGI for the taxpayer, their spouse, and dependents.
Online References
- IRS Topic No. 551 - Standard Deduction, and Itemized Deductions
- Tax Foundation - Exemptions and Phase-Outs
- Investopedia - Personal Exemption Phase-Out (PEP)
Suggested Books for Further Studies
- “J.K. Lasser’s Your Income Tax Professional Edition” by J.K. Lasser Institute
- “Taxation for Decision Makers, 2021 Edition” by Shirley Dennis-Escoffier and Karen Fortin
- “Tax Savvy for Small Business: A Complete Tax Strategy Guide” by Frederick W. Daily
Fundamentals of Exemption Phase-Out: Taxation Basics Quiz
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