2016 – 2017 Itemized Deductions and Personal Exemption Phase-out Income Limit Changes To Adversely Affect Millions of Taxpayers


[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 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 definition of higher income thresholds for these provisions is much lower than the one used for higher federal tax rates 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. Past and upcoming year trends are shown in the following table.

Filing StatusAnnual Income (AGI) Limit Range for Claiming Itemized Deductions and Personal Exemption Phase-out
Year -
20162017 (est)
Single Filer$259,400 to $381,900$259,800 to $382,700
Married Filing/Joint Return$311,300 to $433,800$311,900 to $434,400
Heads of Households$285,350 to $407,850$285,550 to $408,250
Married Individuals Filing Separate Returns$155,650 to $216,900$155,850 to $217,500

Itemized Deductions

The re-instituted 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 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.

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 tax year 2016 rose by $50 to $4,050, up from $4,000 last year. 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 table above. It phases out completely at $381,900 ($433,800 for married couples filing jointly.)

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.

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15 Comments on "2016 – 2017 Itemized Deductions and Personal Exemption Phase-out Income Limit Changes To Adversely Affect Millions of Taxpayers"

[…] likely increase by another $50 in 2015.  However, the exemption is subject to a phase-out (per law enacted earlier this year) that begins with AGI of $254,200 ($305,050 for married couples filing […]

[…] personal exemption rises by $50 to $3,950.  However, the exemption is subject to a phase-out (per law enacted earlier this year) that begins with AGI of $254,200 ($305,050 for married couples filing […]

Tuesday 7:11 pm

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

Tuesday 9:34 pm

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

Tuesday 4:33 pm

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

Monday 5:01 pm

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….

Wednesday 3:24 pm

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

[…] up from the 2012 exemption of $3,800. However beginning in 2013, the exemption is subject to a phase-out that begins with adjusted gross incomes of $150,000 ($300,000 for married couples filing jointly). […]

[…] exemptions and itemized deductions limitations that existed in the Clinton-era would also be reinstated for couples making more than $300,000 […]

Friday 12:01 pm

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.

Monday 11:46 am

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.

Gh McCormick
Wednesday 9:20 am

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

Wednesday 9:26 am

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.

[…] take a hit on their 2013 federal taxes because the fiscal cliff legislation reinstates limits on personal exemptions and itemized deductions for couples making more than $300,000 (singles making more than […]


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