Changes stemming from the fiscal cliff tax legislation not only raised tax rates, but also lowered valuable itemized deductions and personal exemptions for higher-earning taxpayers.
Under the new law, married couples making $300,000 or more ($275,000 for head of households and $250,000 for single filers) will have their personal and dependent exemptions gradually phased out. For every $2,500 of adjusted gross income (AGI) over $300,000, their exemptions will be reduced by 2%. This means that personal exemptions go away completely at income levels over $422,500 for joint filers. These income thresholds will be adjusted annually for inflation.
Itemized deductions will also be limited for certain taxpayers. Write-offs of mortgage interest, property taxes, charitable deductions, and state and local income taxes will be reduced by 3% of that portion of AGI exceeding $300,000 (same income levels as above). There is a limit on this phase-out however; your itemized deductions cannot be reduced by more than 80%. And you may deduct in full your qualified medical expenses, investment interest, and theft and casualty losses. Wagering losses are also left untouched.
So how can you bounce back from the phase-out rules? Obviously, lowering or postponing taxable income to stay under the applicable thresholds will help, not only for avoiding the phase-outs, but also for the other tax increases passed by Congress as well. And to maintain your tax-favored charitable giving, consider the newly reinstated charitable IRA rollover provision. Those age 70½ or older can make tax free gifts of up to $100,000 direct from their IRA without regard to the phase-out rules.
If the one-two punch of the new legislation has you reeling, call our office for a thorough review of your tax situation. Creating a solid tax plan has never been more important.