Reinstate personal exemption phaseout and limitation on itemized deductions
High-income taxpayers face phaseouts of their personal exemptions and itemized deductions as their income exceeds specified levels. The 2001 tax act scheduled a gradual phased elimination of the phaseouts beginning in 2006 with complete elimination in 2010. Under current law, the phaseouts revert to their previous levels after 2010. The president proposes to eliminate the phaseouts and then reinstate them for high-income taxpayers in 2011.
In its full form, the personal exemption phaseout (PEP) reduces the value of each personal exemption from its full value by 2 percent for each $2,500 or part thereof above specified income thresholds that depend on filing status. Personal exemptions are thus fully phased out over a $122,500 range (see phaseout table).
The limitation on itemized deductions—known as Pease after the congressman who introduced it—cuts itemized deductions by 3 percent of adjusted gross income above specified thresholds but not by more than 80 percent. The income threshold—projected to be $169,750 in 2011 ($84,850 for married couples filing separately)—is indexed for inflation.
The president proposes to restore both PEP and Pease in full in 2011. The threshold for the phaseouts would begin at 2009 levels of $250,000 for couples6 and $200,000 for other taxpayers, with both values indexed for inflation. TPC estimates that 2011 thresholds would be $254,450 and $203,550 for couples and others, respectively. Personal exemptions would thus phase out for couples with income between $254,450 and $376,950 and for others with income between $203,550 and $326,050.7 Taxpayers would have their itemized deductions reduced in 2011 by 3 percent of their income over $203,550 (for single filers; the threshold would be $254,450 for couples filing jointly8) but not by more than 80 percent. Both phaseouts would increase marginal tax rates for taxpayers in the affected income ranges.
6.PEP would start at $125,000 (indexed forward from 2009) for couples filing separately.
7.The values for married couples filing separately would be half those for joint filers.
8.The proposal does not say what the Pease thresholds would be for heads of household or for married couples filing separately. The current threshold for heads of household is the average of the thresholds for singles and married couples filing jointly; that for married couples filing separately is half that for couples filing jointly. If the same relationships applied to the 2010 budget proposals, the 2011 thresholds for heads of household and married filing separately would be $214,750 and $117,725, respectively.
Tax Policy Briefing Book: Income Tax Issues: How do phaseouts of tax provisions affect taxpayers?
Press Resources: Limitation on Itemized Deductions
Press Resources: Personal Exemption Phaseout