Tax Deduction Phase Out
The United States has a progressive tax system. This means that many tax deductions go through a gradual phase out as income increases.
Tax Deduction Phase Out
The idea behind a progressive tax system is that the people with a higher income pay a higher percentage of tax than those with a lower income. It would be easy to spend a lot of effort debating the fairness or lack of fairness of a progressive tax system. The bottom line is that it is the system we are stuck with for now and understanding it is essential to our financial well being regardless of our position on its fairness.
Tax deductions are ways of making the tax system fairer. There are certain things that can not really be considered useable income and the system views non-useable income as non-taxable. This is the basis of tax deductions. However, since the system is progressive, there are limits on these deductions. A tax deduction phase out amount is the level at which the deduction amount begins to be reduced by a certain percentage until it eventually reaches zero. It is phased out.
An example is the personal exemption. This amount is allowed a taxpayer as a sort of free income. The personal exemption for a single taxpayer is currently $3,300. A married taxpayer can claim another exemption for his spouse and each of his dependents. The total number of exemptions claimed is multiplied by $3,300 to give a figure called the adjusted gross income. This is the amount that is actually taxed.
When your income reaches $150,500 for single, head of household, or married filing separately, your exemption begins to phase out. You need to consult the instructions for the Form 1040 issued by the IRS each year to calculate exactly what your exemption will actually be once you are over this phase out amount.
Many individual deductions have progressive phase out amounts as income increases. It is necessary to know these levels when preparing your itemized deductions. Low income tax payers generally do not have to worry much about tax deduction phase out amounts. It is the higher incomes that will have to check out phase out levels to insure they may take the full deductions. This is how a progressive system works, and for now, this is the system we have to live with.