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Phaseouts For Tax Benefits

By JLP | January 10, 2007

My friend and frequent commenter, Stacey, has mentioned this before and I’m finally getting around to writing about it.

When figuring our taxes, most of us take advantage of various deductions and credits, which help reduce our tax bill. That said, one thing that can totally screw it all up are the various income phaseouts that reduce or eliminate the deduction or credit. It makes tax planning very difficult.

Anyway, today’s Wall Street Journal published a an interesting article along with a helpful little chart that explains the various provisions and how they are affected by the phaseout. I took the chart and made it into the following table:


Provision

What it is

Phaseout
(for Married Filing Jointly)

Personal Exemptions

Exemptions for yourself,
spouse and dependents.

Phaseout begins at $234,600 and tops
out at $357,1001

Itemized Deductions

Deductions for such items as state
and local taxes and charitable
donations.

Limit begins on certain deductions once income
exceeds $156,400. You can’t lose more than 80%
of deductions affected by limit.1

Child Tax Credit

Tax credit for qualifying children.

Credit is reduced for income above $110,000.2

Deduction of
Student-Loan Interest

Interest on student loans may
be deductible.

Phaseout begins at $110,000 and tops out at
$140,000.2

Mortgage-Insurance Deduction

New benefit this year for many
people who buy mortgage insurance.

Phaseout begins once income exceeds $100,000
No deduction if income exceeds $109,000.1

1. Based on adjusted gross income 2. Based on “modified adjusted gross income” Source: Wall Street Journal

Many experts are calling for the phaseouts to be eliminated. However, don’t count on this anytime soon since eliminating the phaseout would mean that the IRS would lose out on billions of dollars of revenue each year.

All of this is just another reason why we need to scrap our tax code and come up with something that is simple, transparent, and fair!

Topics: Tax Planning, Taxes | 9 Comments »


9 Responses to “Phaseouts For Tax Benefits”

  1. BD Says:
    January 10th, 2007 at 1:12 pm

    Are these the income limits for married taxpayers? How are they different for singles?

  2. samerwriter Says:
    January 10th, 2007 at 3:46 pm

    My prescription for taxcode simplification: Stop patching the AMT. It’s simpler to calculate one’s AMT liability than non-AMT liability.

    The phaseouts are a major pain. They make it significantly more difficult to accurately calculate withholding, especially if one has significant variable income (bonuses, stock options, etc..) that are not known ahead of time.

    There are many arguments for over-withholding (despite the obvious drawbacks), and the phaseouts are one of them.

  3. Financial Freedumb Says:
    January 10th, 2007 at 4:47 pm

    “All of this is just another reason why we need to scrap our tax code and come up with something that is simple, transparent, and fair!”

    Yes! One day I hope…

  4. Dus10 Says:
    January 10th, 2007 at 8:51 pm

    The Fair Tax!

    And would they really be missing out on billions? Really, there are not all that many people (relative to the size of the population) that earn above those figures. Withstanding the itemization, we are only talking about fairly small sums of money when you are looking at it in a macro sense.

  5. Dus10 Says:
    January 10th, 2007 at 8:54 pm

    To add…

    The idea that Charlie Rangle has been throwing around about exempting the first X dollars of your income from FICA would have a great impact than get rid of these phase outs. They have mentioned exempting the first $10K of everyone’s income, and they have mentioned bumping the SS cap up $10K. However, I don’t think they could recover the $10K exemption even if they got rid of the SS cap all together.

    It is just more political posturing to buy votes…

  6. Sam Says:
    January 10th, 2007 at 10:07 pm

    I won’t hold my breath waiting for the phase-outs to be phased out. If anything, I think the new Congress will be looking to do the opposite, tilt the tax code away from high earners toward low earners.

    It seems only fair to at least index the phase-outs for inflation, but again I don’t expect this to happen. My pet peeve is the phase-out for contributions to a Roth IRA, (or a standard IRA for that matter).

  7. Stacey Says:
    January 11th, 2007 at 8:51 pm

    Amen Sam! That’s my pet peeve as well. Stay-at-home parents who are married to high-earners are screwed when it comes to saving (tax-deferred) for retirement. Add the 70-whatever cents (women) earn on the dollar and it’s no wonder so many elderly women live in poverty…Hope I can sell pencils (or something )on the streetcorner in 40 years…

    JLP, thanks for the nod…I’ve been busier than sin…which is pretty busy as we all know!

    xoxo, SLM

  8. Free Money Finance Says:
    January 12th, 2007 at 6:21 am

    Star Money Articles for the Week of Jan. 8

    Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: Consumerism Commentary is covering the US News Annual Investing Guide. AllFinancialMatters details the phaseouts for tax benefits. MightyBargainHunter lists 16 …

  9. fivecentnickel.com Says:
    March 19th, 2007 at 7:26 am

    Yeah, the Roth phaseout is really irksome, because you’re not actually dodging current taxes when you contribute to a Roth.

Comments