The Internal Revenue Service limits your ability to write off many different expenses against your taxes. Some limitations, like the Pease Limitation, are tied to your income where the more you make, the less you can deduct. For many families, though, the Alternative Minimum Tax is an extremely significant tax write-off limitation.
Made a permanent part of the tax code by the American Taxpayer Relief Act of 2012, the Pease Limitation rolls back some itemized deductions for high income taxpayers. In the 2013 tax year, this limitation affects married taxpayers with adjusted gross incomes over $300,000 or single taxpayers with AGIs greater than $250,000. If you fall subject to this deduction cap, your write-offs for your charitable donations, your mortgage interest, property taxes, state and local income taxes and other miscellaneous itemized deductions will be reduced. To see how the Pease Limitation works, consider a married couple that has an AGI of $450,000 in 2013 and claims $50,000 in itemized deductions. The limitation lets you choose from two methods to find the highest possible deduction. First, you'd multiply your income over the $300,000 limitation by 3 percent to find a $4,500 limitation. Next, you'd multiply your total itemized deductions by 80 percent to find a limitation of $40,000. Since the $4,500 limitation is less, you'd subtract that from the $50,000 and claim $44,500 in deductions.
Personal Exemption Phaseouts
The personal exemption phaseout limits high income earners' ability to claim personal exemptions for themselves and their dependents. As of 2013, the PEP comes into effect for married couples filing jointly with AGIs of $300,000 or higher, heads of households with $275,000 or more in AGI, single people with $250,000 or more in AGI or married couples filing separately with at least $150,000 in AGI. For every $2,500, or fraction of $2,500, in income over that threshold, you lose two percentage points of your total exemption. For example, if you are married with $314,000 in income, you would have $14,000 in extra income, which would correspond to a 12 percent reduction in the exemptions that you could claim.
The Alternative Minimum Tax
The Alternative Minimum Tax is a special income tax that works differently from the regular income tax. In exchange for getting a special tax rate that is almost completely flat and receiving a large AMT exemption, you lose the ability to claim personal exemptions and just about every other tax deduction, except for home mortgage interest and charitable contributions. The AMT and its deduction limitations ensnared approximately half of American taxpayers with incomes between $200,000 and $500,000, based on research from the Tax Policy Center.
Miscellaneous Deduction Limitations
The IRS limits many other deductions based on your income. If you lose money on your real estate investments, you may be able to use up to $25,000 of those "passive activity losses" to offset other income. For every $2 of modified AGI over $100,000 per year, though, the IRS takes away $1 of your loss write-off. As another example, you can also write off up to $2,500 per year of qualifying student loan interest on your own, your spouse's or your dependents' loans. However, the deduction starts to go away if your modified AGI exceeds $75,000 if you file a single return or $155,000 if you file a joint return.
- Forbes: Pease Limitation Puts A Lid On Itemized Deductions For Wealthy Folks
- Tax Policy Center: Tax Topics - Quick Facts: Alternative Minimum Tax (AMT)
- Fairmark: Personal Exemption Phaseout
- Lancaster Online: Passive Activity Loss Limitations on Real Estate Tax Shelter
- Intuit TurboTax: Can I Claim the Student Loan Interest Deduction?
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.