Personal Exemption Phaseout

Personal Exemption Phaseout (PEP) reduces personal exemptions ($3,650 in 2009) for both taxpayers and their dependents by 2 percent for each $2,500 (or part of $2,500) that adjusted gross income (AGI) exceeds the threshold for the relevant filing status. In 2009, the income range over which exemptions phase out are:

The 2001 tax act limits the reduction in 2009 to no more than one-third of a taxpayer’s full exemptions; thus, each exemption cannot be reduced below $2,433. That maximum reduction occurs when AGI exceeds the relevant threshold by more than $122,500.

The 2001 tax act decreases the reduction in 2009 to 1/3 of its full value. The reductions disappear entirely in 2010 but reappear in full with the sunset of the 2001 tax act in 2011.

Examples

Single filer with no dependents and AGI = $200,000 Income exceeds phaseout start by $33,200 (= $200,000 - $166,800); divide that excess by $2,500 = 13.28, which rounds up to 14. Reduction = 14 times 2 percent = 28 percent of $3,650 = $1,022. Reduction in personal exemption is 1/3 of $1,022, or $341.

Married couple with two children and AGI = $275,000 Income exceeds phaseout start by $24,800 (= $275,000 - $250,200); divide that excess by $2,500 = 9.92, which rounds up to 10. Reduction = 10 times 2 percent = 20 percent of $14,600 = $2,920. Reduction in personal exemption is 1/3 of $2,920, or $973.

Values for 2008 tax year

Individual Income Tax Parameters (Including Brackets), 1945-2009