More Deductions Reduced for the Rich

It’s both good news and bad news for taxpayers with some of the laws included in The American Taxpayer Relief Act of 2012. If your adjusted gross income (AGI) is more than $178,150 but less than $300,000 married filing jointly, you can likely rejoice, as the Act permanently repealed the limitations on itemized deductions for tax years beginning after December 31, 2012. Without the Tax Act, the applicable threshold for couples would have reverted to $178,150. Often called the “Pease limitations,” after the Congressman who sponsored the original legislation, the limitations on itemized deductions were repealed in 2010 through 2012.

Unfortunately, if your AGI is more than $300,000 married filing jointly your itemized deductions will likely be reduced by the lesser of 3% of your AGI above $300,000, or by 80% of the amount of the itemized deductions otherwise allowable for the taxable year. With the reinstatement of limitations for couples with AGI above $300,000 ($250,000 for single filers), the wealthy can say goodbye to the “lucrative loopholes” they found in charitable contributions, mortgage interest, state, local and property taxes and miscellaneous itemized deductions. With the higher AGI thresholds, a couple with an AGI of $500,000 and itemized deductions of $29,500 should see their itemized deductions reduced by $6,000. Since this couple is in the 39.6% federal tax bracket, and assuming 6% state tax, this will cost them $2,736 in real dollars.

The Pease limitation on itemized deductions does not apply to medical expense deductions, investment interest, casualty, theft or wagering losses. However, in 2013, the medical expenses deduction only applies to qualified medical expenses over 10% of your AGI. In our example above, the couple needs more than $50,000 in medical expenses before they would be able to take a tax deduction.

Personal exemptions were also permanently repealed for certain taxpayers. Since 2010, personal and dependency exemptions have not been subject to limitations based on income, but those provisions expired in December. The Tax Relief act of 2012 extended the repeal for couples with AGI below $300,000 ($250,000 for single filers). But for those taxpayers over the AGI thresholds, this phaseout reduces the personal exemption by 2% for each $2,500 (or a portion thereof) above the specified income thresholds, depending on filing status. Personal exemptions are fully phased out for couples with incomes above $425,000 or $375,000 for single filers. Basically, if you and your spouse have an AGI of $500,000, you can no longer refer to your children as “tax deductions.”

At Henssler Financial we believe you should Live Ready, which includes understanding how new laws affect your taxes. If you are interested in getting a quarterly tax projection to see how increased taxes may affect you, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.

Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.

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