In the fiscal cliff deal, Congress surprisingly reinstated two additional tax increases. The Personal Exemption Phaseout (PEP) and “Pease,” the limitation on itemized deductions, were 2 tax policies revived beginning January 1, 2013. Itemized deductions (except for medical expenses, investment interest, casualty and theft losses, and gambling losses) phase out as AGI tops certain thresholds. You’ll lose 3 cents of deductions for every dollar of income over the threshold, up to 80% of your total. Reporting expenses elsewhere can sidestep these phaseouts.
Personal Exemption Phaseout
Personal exemption phaseouts add up to by 2% for each $2,500 or fraction that your AGI exceeds certain thresholds. There’s really no way to beat this as there is for itemized deductions. You just have to swallow the “stealth” tax, or use strategies to reduce AGI.