Personal exemption phaseout - i need help with a hypo Forum

[Breezin]

I don't understand how you apply the personal exemption phaseout.

§151(d)(3) of the Code provides that a taxpayer’s personal exemption amount is reduced by 2 percentage points for every 2500 by which the taxpayer’s AGI exceeds the “threshold amount.”

Here is the hypothetical from my casebook:

A married couple files a joint return. They are entitled to 5 personal exemptions before taking into account sec. 151(d)(3). The inflation-adjusted personal exemption amount is 3000. The threshold amount for joint returns is 200,000. Their official marginal tax rate (under s.1(a)) is 35%.

One spouse is considering working overtime to earn 10000 extra dollars. This would put their AGI from 200,000 to 210,000. How much of that 10,000 would the couple be able to keep?

[Breezin]

I believe this is wrong:

We reduce the couple's personal exemption amount by 8% (2% x 4)--(I multiply by 4 because their AGI exceeds the threshold amount by 10,000).

So we subtract 1200 for the phaseout (5 x 3000 = 15000, personal exemption amount) x (8%).

We subtract 3500 tax on the extra income (35% x 10000).

So the couple gets to keep only 5300.

[sarahh]

You treated the $1,200 from the phaseout as an amount of tax. It should be added to the $10,000 in extra income. So the extra tax they would pay is $11,200 x .35 = $3,920.