Personal exemptions and filing for dependents on your tax return reduces the tax that you pay on your income. Before the current tax laws were enacted personal exemptions were subject to phase-out limits based on income and the phase-out will be reinstated for 2013 if no further action is taken by the government.
The Current Tax Laws
Under the current tax law there are no phase-out limits on personal exemptions or filing for dependents meaning the amount of exemptions does not gradually decline as income increases. For example someone who makes $250000 per year gets the same deduction as someone making $50000 per year.
How the Change will affect you
If no legislation is made to amend the tax code the personal exemption phaseout will come back into play. For high wage earners this will affect you the hardest. How it works is that for each taxpayer’s adjusted gross income (AGI) that exceeds the threshold amount the personal exemption amount reduced by 2% for every $2500 that goes above the threshold amount.
For example if you made $10000 above the threshold limit for your filing status you would receive 8% less of your personal exemption than you see on your taxes now.
How to plan for the change
If you are a high wage earner that exceeds your threshold amount for your filing status ($173650 for singles and married filers with more than $260500 in yearly income) you should consider the phaseout to impact you in 2013’s filing year.
There are two ways to effectively plan for this change; one option is to pay higher estimated taxes or to account for the change by increasing your withholdings.