2017 and 2018 Itemized Deductions and Personal Exemption Phase-out Income Limit Changes To Adversely Affect Millions of Taxpayers

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[Trump Tax Reforms and impact to Itemized Deductions] As part of GOP tax reform bills to support President Trump’s tax reform agenda there are going to several changes to which deductions can be taken in 2018 and beyond. The President hasn’t yet signed any bill into law yet but with the GOP needing to pass tax reform it is likely the GOP tax reform package will get enacted in some manner. Below is a summary of key changes across House and Senate bills from the Wall Street Journal


[Updated for latest levels] Legislation a few years ago raised the threshold for those required to pay higher tax rates and also included provisions to restart limits on certain itemized deductions (Pease) and personal exemptions (PEP) that were phased out and eventually removed as part of the turn of the century Bush-era tax cuts. PEP and Pease were the two provisions in the tax code that increased taxable income for high-income earners. PEP is the phaseout of the personal exemption based on income level and Pease (named after former Senator Donald Pease) reduces the value of most itemized deductions once a taxpayer’s adjusted gross income (AGI) reaches a certain point.

But the income thresholds (limits) for these provisions is much lower than the higher end federal tax bracket income thresholds and so will apply to a lot more people. These income limits are tied to official CPI measures and hence are adjusted for inflation every year.

Itemized Deductions


The re-instituted Pease phase-out limitation on itemized deductions cuts the amount of deductions you can take by 3% of adjusted gross income (AGI) above the specified income thresholds shown in the table below, but you cannot lose more than 80% of the affected itemized deductions. This means that tax payers whose AGI is greater than the specified income thresholds won’t be able to take all of the deductions associated with items like home mortgage interest, charitable donations and state/local income tax payments. While a lot of itemized deductions are affected by the itemized deduction limitation, some such as medical expenses, investment interest and gambling losses are not subject to the limit. 

Filing StatusAdjusted gross income (AGI) Pease Limitation for Claiming Itemized Deductions
Year -
20182017
Single Filer$266,700$261,500
Married Filing/Joint Return$320,000$313,800
Heads of Households$293,350$287,650
Married Individuals Filing Separate Returns$160,000$156,900

For an example of the above consider a married couple with income of $400,000 who file their tax return with $50,000 in itemized deductions. This couple is $100,000+ above the itemized deduction AGI threshold meaning that their allowed deductions would be reduced —potentially adding to their tax liability by about $1,000.

Personal Exemptions

You are generally allowed to deduct the personal exemption for yourself, your spouse, and your eligible dependents. The personal exemption for 2017 and 2018 is $4,050. But with the new Personal Exemption Phase-out (PEP) the value of each personal exemption is reduced from its full value by 2 percent for each $2,500 above the specified income thresholds in the following table. It phases out the ability to claim the personal exemption completely at $389,200 for single filers and at $442,500 for married couples filing jointly.

Filing StatusAnnual Income (AGI) Limit Range for Personal Exemption Phase-out
Year -
201620172018
Single Filer$259,400 to $381,900$261,500 to $384,000$266,700 to $389,200
Married Filing/Joint Return$311,300 to $433,800$313,800 to $436,300$320,000 to $442,500
Heads of Households$285,350 to $407,850$287,650 to $410,150$293,350 to $415,850
Married Individuals Filing Separate Returns$155,650 to $216,900$156,900 to $218,150$160,000 to $221,250

What This Means For You

If your AGI is below the above thresholds then you should see no impact from the above changes and can claim your personal exemptions and itemized deductions as you normally would. Higher income taxpayers though will face reductions and likely see higher tax bills as the value of their personal exemptions and itemized deductions are reduced.

{ 11 comments… read them below or add one }

Eugene Sasser August 30

This was helpful information.

Reply

Andy (Author) September 16

Here is an example of how the above works:

Personal Exemption:

Ralph and Louise have an AGI of $412,500 for 2013 and two children for a total of four exemptions totaling $15,600 (4 × $3,900). The threshold for a married couple is $300,000; thus, their income exceeds the threshold by $112,500. Dividing $112,500 by $2,500 equals 45. So 90% (45 × 2%) of their $15,600 exemption allowance is phased out, leaving them with a reduced exemption deduction of $1,560 ((100–90) × $15,600). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out costs them an additional $4,633 ($15,600 × 90% × 33%).

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Dennis March 5

I heard that the 2013 itemized medical deduction limit was changed from 7.5% to 10% of AGI. Is this true?

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Karla March 5

Yes. Everything I have read says the new limit is 10% of AGI.

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Andy (Author) July 9

Correct. Before 2013, you could claim an itemized deduction for medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceeded 7.5 percent of your adjust gross income (AGI). But thanks to the health care law (and not the fiscal cliff act) an even higher threshold of 10 percent of AGI applies to most taxpayers. The exception is if either you or your spouse will be 65 or older as of December 31, 2013, the unfavorable new 10 percent-of-AGI threshold will not affect you until 2017

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D February 18

Interesting. This example applies to families earning over $200,000. I am not certain that it is relevant to the vast majority of Americans and I wish the politicians would stop moaning about the current shift in American economic policy….

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me April 15

this applies to ALL politicians, as all are making over 200k. they don’t care about the rest of us.

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Karla January 11

I see one correction needed. The computation for the reduction of the personal exemptions is wrong. The deduction would be reduced by 2% x ($100,000/$2,500) or 80%. Assuming no children in this example the reduction would be 80% x ($3,800*2) or $6,080. The reduction would increase by $3,040 for each child.

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Wanda February 4

I agree, Karla, except that the 2013 personal exemption amount was raised to $3,900. So in the example of a married couple (assuming no children or other dependents) the personal exemption amount would only be $1,560 instead of the full $7,800.

Married filing joint with an AGI of $425,000 or more would get no benefit at all from personal exemptions, for themselves or any children/dependents they might have.

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Gh McCormick January 9

Is the the Pease limit the sane as the itemized deduction limit?

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Andy January 9

Yes. The itemized deduction limit was introduced by Donald Pease (D. Ohio) – a congressman who who sponsored the bill that created the itemized deduction limit. As described above it reduces most itemized deductions by 3% of excess AGI up to a maximum reduction of 80 percent of itemized deductions. The limit does not apply under the AMT.

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