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2013 Means Rising Tax Rates, Shrinking Tax Deductions for High Income Earners

Posted by McDonald & Osborne Posted on Oct 14 2015

By now, most of us realize tax rates are rising for “high income earners” for the 2013 tax year with the introduction of a higher top marginal rate (39.6%), the new 20% top rate on capital gains and qualified dividends, a new Medicare tax on net investment income, and the 0.9% additional Medicare tax on all individual taxpayers earning more than $200,000 ($250,000 married filing joint). We introduced and explained these new rates back in January in our post, “ Understanding and Planning for the New Heath Care Surtax .” Although this knowledge has been available for some time, we are afraid, however, that many are overlooking and underestimating the effects of shrinking tax deductions. Along with the rising rates, high income earners will face the re-introduction of Personal Exemption phase-outs (PEP) and Pease limitations on itemized deductions.

PEP and Pease Limitations will apply to Adjusted Gross Incomes (AGI) over:

$300,000 married filing joint/surviving spouse filers

$275,000 for head of household filers

$250,000 for singles individuals

$150,000 for married filers who file separately

Personal exemptions will be phased-out by 2% for each $2,500 that AGI exceeds the threshold amount and can be reduced to zero. Pease limitations originated back in 1990 and were named after Congressman Donald Pease during the Omnibus Budget Reconciliation Act. These limitations were designed to raise revenues by reducing some popular itemized deductions for high-income earners such as charitable contributions, mortgage interest, property taxes and miscellaneous itemized deductions.

Pease limitations reduce itemized deductions by 3% of the excess of AGI over the applicable threshold amount. These limitations can not reduce your itemized deductions to zero like the personal exemption phase-outs, but they can be reduced by as much as 80%. That can be a huge figure for many taxpayers. So don’t overlook these new limitations in your 2013 year-end tax planning. It is as important now as ever to implement a solid plan for the upcoming filing season.

Stephen Osborne