High-Income Taxpayers Should Maximize Charitable Contributions, Other Itemized Deductions in 2010

April 29, 2010

PEP and Pease Provisions Restricting Personal Exemption, Itemized Deductions for High-Income Earners Slated for Return in 2011 After Gradual Phase-out, Repeal for 2010

Washington, DC, April 29, 2010 -- If high-income taxpayers are contemplating a major charitable gift in the near future, 2010 is the year to do it - before restrictions on itemized deductions return in 2011 from a one-year hiatus. The so-called PEP and Pease provisions of the federal individual income tax, which limit the benefits of the personal exemption and itemized deductions for taxpayers over a certain income level, have been repealed for 2010 but are scheduled to return in 2011.

A new Tax Foundation special report explains the history of the PEP and Pease provisions and outlines how the reinstatement of the tax laws will affect taxpayers at various income levels under President Obama's budget.

"The federal individual income tax has, since its inception, allowed for personal exemptions to provide tax relief to low-income filers," said Tax Foundation Chief Economist Patrick Fleenor, who authored the report. "Over time, politicians have also created itemized deductions to favor certain products and services. To raise revenue, the federal government has over the past 20 years scaled back the benefits of personal exemptions and itemized deductions by phasing them out for high-income people through the PEP and Pease provisions, which have created significant problems, raising marginal tax rates and adding to tax complexity."

Tax Foundation Special Report, No. 178, "PEP and Pease: Repealed for 2010 But Preparing a Comeback," is available online at http://www.taxfoundation.org/legacy/show/26260.html.

In some cases, PEP and Pease push the marginal tax rate up substantially. Next year, under President Obama's budget, a married couple filing jointly with combined AGI of $254,550 would pay a 28 percent rate without PEP and Pease, but a 30.5 percent rate with PEP and Pease. Couples earning a little more, over $262,950 in AGI, would face a marginal effective tax rate of 39.2 percent instead of 36 percent, according to the report.

The Pease provision, named after former U.S. Representative Donald Pease (D-OH), phases out the benefits of itemized deductions -- such as deductions for mortgage interest, state and local tax paid and charitable contributions -- for high-income earners. In 1991, the first year it was in effect, the income threshold below which a taxpayer would keep the entire value of his itemized deductions was $100,000 in AGI for joint filers and $50,000 for all other filers. A taxpayer declaring income above the threshold and claiming itemized deductions that are subject to Pease would have to subtract 3 percent of the income above the threshold from the deduction amount.

In 2009, the phase-out threshold for Pease, which is indexed for inflation, was $166,800 for joint filers and $83,400 for other filers. Under President Obama's policies, the threshold for Pease would be $254,550 for married couples and $203,650 for singles.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.

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