Unfortunately, if your AGI is more than $300,000 married filing jointly your itemized deductions will likely be reduced by the lesser of 3 percent of your AGI above $300,000, or by 80 percent 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 percent federal tax bracket, and assuming 6 percent 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 percent 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Personal exemptions were also permanently repealed for certain taxpayers.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 percent 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.”
The American Taxpayer Relief Act also temporarily extends the increase in the maximum amount and phaseout threshold under section 179 depreciation. The dollar limit is $500,000, with a $2 million investment limit. The limits were retroactively applied to 2012, and extended through 2013. Basically, a sole proprietor, partnership, or corporation can elect to deduct the cost up to $500,000 of depreciable, tangible personal property acquired for use in a trade or business in the year of purchase. Without the benefit of a Section 179 deduction, the cost of business equipment normally is recovered over several years through depreciation deductions. This accelerated deduction can substantially help businesses that are purchasing start up equipment or upgrades to existing equipment.
William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner.The MDJ will periodically publish columns from KSU business faculty.