Personal Exemption

As part of my research while implementing my mortgage estimator I discovered that, in addition to the standard deduction, the federal income tax code includes a personal exemption. Together, these two are intended to prevent subsistence-level income from being taxed. In other words, Congress intended to shelter the lowest rungs of society from taxation.

Now, obviously, the richer you get the less you need the personal exemption...when you make $200,000/year there is no risk of not being able to afford to eat. Accordingly, the IRS phased-out the amount of the personal exemption one could claim on their federal taxes as their income increased. For example, in 2009, the personal exemption was $3,650 but, for couples filing jointly whose adjusted gross income exceeded $372,700 the personal exemption was reduced to $2,433.

It is only a $1,217 difference, which at the maximum marginal tax rate would only amount to a little over $400 per person. Hardly a drop in the bucket for a couple making $372,700/year.

But the personal exemption phaseout was eliminated under President Bush's 2001 tax reforms...effective 2010. Besides ignoring the intent of the personal exemption, were the richest 1% of Americans really hurting for $400?

Fortunately, this is one tax cut for the rich that won't be sticking around: the budget proposals for 2011 restore the personal exemption phaseout. I hope they spent their one-time $400 windfall wisely.