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What is a personal exemption phaseout? How does it work? Can you explain it to me in a way I can understand it?

Personal Exemption Phaseout (PEP)
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Tax Professional Answers

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Kathryn Morgan
The PEP reduces the total dollar amount of exemptions available by 2 percent for every $2,500 (or portion thereof) that a taxpayer's AGI exceeds the threshold for their filing status. 

The 2013 phaseout thresholds are:

  • $250,000 for single taxpayers
  • $300,000 for married filing jointly and surviving spouses
  • $275,000 for head of household
  • $150,000 for married filing separately

The phaseout thresholds are indexed for inflation for tax years beginning after 2013. The PEP was suspended during tax years 2010, 2011 and 2012.

Example: Jon, a single taxpayer, has AGI of $275,500 in 2013. The 2013 phaseout for personal exemptions began at $250,000 for single taxpayers. Without any phaseout, the personal exemption in 2013 is $3,900.

Excess of AGI over phaseout threshold: $25,500 ($275,500 - $250,000)
Divide result by $2,500 and round up to the next whole number: $25,500 / $2,500 = 10.2, rounded up to 11
Multiply result by 2% = 22% (11 x 2%) 
Exemption phaseout of 22% = $858 ($3,900 × 22%)
Jon's personal exemption in 2013: $3,042 ($3,900 - $858)

If you use the formula above and plug in your number it will work out every time.  Or if you would care to provide some number I would be happy to do the calculation for you.

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