The only problem is that in 2006 the tax law will change
with regard to the 1/3 phaseout reductions for personal
exemptions and itemized deductions. The 2005 software will
not reduce the phaseout amount by 1/3 so you will have to do
this manually. The 2006 software won't likely be out until
the third quarter of 2006.

A P Limbert CPA
http://www.acaudex.com
Los Angeles, California

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A recommendation is to compute a rough draft of your 2005
return for any last minute tweaking. You probably have 96%
of your pay stubs and brokerage statements by now. Since
there werent major tax law changes (not an election year!),
last years tax software is adequate for a rough draft.
Preliminary 2005 tax software has been in stores since
Thanksgiving.

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Interesting question, I believe that the 2% phase out will
be dropping down to 1.3%.

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

In effect, the rate of reduction is lowered by 1/3.

The mechanism the statute uses is to reduce the amount that
is subtracted from the personal exemption amount. Since the
dollar amount of the reduction is the personal exemption
amount, multiplied by 2%, multiplied by the number of times
$2,500 divides AGI rounded up to the next integer value, is
then multiplied by 2/3, it is the equivalent of simply
multiplying the 2% rate by 2/3.

The dollar amount by which the exemption is reduced is
itself multiplied by the "applicable fraction," meaning that
this dollar amount becomes smaller, thereby reducing the
personal exemption by a smaller amount. The threshold
amount is not affected by the phaseout of the limit on the
personal exemption.

The way the statute works (Code Sec. 151(d)(3)) is that the
personal exemption is reduced by an amount equal to the
personal exemption amount times (2 *
((AGI-Threshold)/$2500)) percent, where the amount
((AGI-Threshold)/$2500) is rounded to the next highest
integer value.

For example, if (AGI-Threshold) = $28,250, then
((AGI-Threshold)/$2500) = 11.3, which rounds up to 12; the
amount by which the personal exemption (assuming the same
$3,200 as for 2005) would be reduced in this example is:
$3,200 * (2 * 12 = 24) percent = $768. The allowable
personal exemption would then be $3,200 - $768 = $2,432.

The amount of this reduction is phased out starting with
2006 by multiplying that reduction amount by 2/3. So, in
the example, if the reduction amount is $768, then 2/3'ds of
that is $512, meaning that the allowable personal exemption
would be $3,200 - $512 = $2,688.

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

I know, I'm still sorting the shoe boxes full of receipts,
so I'm thinking too early. But, the online version of
Publication 17 says, under "What's New For 2006", that
"The phaseout of the limitation on personal exemptions will
be reduced by 1/3."
and
"The phaseout of the limitation on itemized deductions will
be reduced by 1/3."

As I understand it, MFJ phaseout of personal exemptions
begins at $218,950, at two percent per $2500 of AGI above
that. Does this mean that the 218,950 amount is reduced by
one-third? Or that the rate will decrease at one-third,
i.e. to 1.33% for each 2500? Or does this have some other
wonderful and mysterious meaning?

It's already mysterious enough for me )

Best regards,

Hank Murphy
speaking only for myself

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >