Several limits on personal exemptions and deductions are being imposed on individuals beginning in 2013 and many taxpayers will be affected by these new limitations. These deductions can change each year, so as the end of the year approaches you need to be aware of the new limitations.
The Phaseout of the Personal Exemption (PEP):
Single filers with adjusted gross income (AGI) in excess of $250,000 or couples who are married filing jointly and have AGI in excess of $300,000 will face phaseouts of their personal exemptions starting in 2013. For every $2,500 of AGI over the threshold of $250,000 ($300,000 married filing jointly), the $3,900 per-person personal exemption will be reduced by 2%. The personal exemption will be completely phased out once a single taxpayer’s AGI exceeds $372,501 ($422,501 married filing joint).
The Phaseout of Itemized Deductions (Pease):
This limitation will affect taxpayers with AGI in excess of $250,000 ($300,000 married filing joint). The Pease limitation reduces the value of itemized deductions by 3% of the AGI above the threshold amounts. This limitation will reduce the tax benefit of the mortgage interest, state income tax, home office, and various other itemized deductions on those taxpayers exceeding the AGI threshold. However, itemized deductions for certain medical expenses, investment interest, and for casualty, theft, or gambling losses are exempt from the phaseout.
Historically, you have been able to deduct medical expenses that exceeded 7.5% of your AGI; however, in 2013 this threshold has increased to 10%. There is a temporary exemption from the increase from Jan. 1 2013 through Dec. 31 2016 for individuals age 65 or older and their spouses. Flexible Spending Accounts (FSA) contribution limits have decreased to $2,500 (from $5,000 in 2012) per person.
Hypothetical example— Susan had medical expenses of $5,000 and her AGI was $55,000. In 2012 she would be able to deduct $875 because this was the amount in excess of 7.5% of her AGI. In 2013, using the same facts, Susan would not be able to deduct any of her medical expenses because the total expenses do not exceed 10% of her AGI.
As always, please contact us to discuss the possible impact these limits might have on your tax liability for the year.
“Few of us ever test our powers of deduction, except when filling out an income tax form.”
— Laurence J. Peter, author