Fisher Investments Editorial Staff

Pease Takes a Piece

By, 01/24/2013

Following recent Congressional budget melees, many Americans immediately noticed the increase in payroll taxes and new ACA-related taxes. However, little discussed thus far is reinstatement of the Pease Amendment, which limits itemized deductions for high earners—in 2013, that means individuals earning over $250,000 and couples over $300,000. (The amount will be adjusted for inflation moving forward.) And because this kicks in for 2013, many filers may not be aware until they sit down with their accountants early in 2014—well after they’ve made all their 2013 donations.

Those impacted must reduce their itemized deductions by whichever of the following is lower:

3% of adjusted gross income (AGI) that exceeds the Pease threshold, or

80% of otherwise allowable itemized deductions.

To illustrate, here’s an example using big round numbers. Suppose a couple filing in 2014 had $1,300,000 in 2013 AGI. They had $100,000 in itemized deductions (including state income tax, mortgage interest deduction, charitable contributions, etc.).

Subtract the $300,000 Pease threshold for $1,000,000.

Multiply $1,000,000 by 3% = $30,000.

Multiply the $100,000 in itemized deductions by 80% = $80,000.

The lower amount is $30,000. Now, subtract that from the itemized deductions ($100,000 - $30,000) and the remainder is $70,000.

This couple may now deduct just $70,000.

That $70,000 could easily be the totality of their state income tax and just part of their mortgage interest. The remainder of the mortgage interest and charitable contribution are no longer tax deductible.

For high earners in high-tax states, itemized deductions can get astronomical (the same couple living in California could easily have itemized deductions in excess of $250,000 thanks to the 13.3% tax rate and high property values). For them, the AMT still applies, and it likely takes a big whack out of their itemized deductions anyway.

If you’re a charitably inclined high earner counting on those tax deductions, you may want to start 2013 tax planning now.                                                                                      

For more on the tax impact of the American Taxpayer Relief Act, see our cover story Out With the Old, In With the Same Old.

Click here to rate this article:

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.