Return to the Personal Exemption Phase-out

Higher-income farmers also saw a reduction to their personal exemption amount through the 2009 tax year. Personal exemption amounts remained fully intact from 2010 through 2012, but ATRA brings back this reduction of the farmer's personal exemption for 2013 and subsequent tax years. The personal exemption amount is also reduced according to a formula. Generally, for each $2,500 (or remaining fraction of $2,500) of AGI the farmer has that in excess of the AGI threshold, the personal exemption amount is reduced by 2%. The AGI threshold amounts used are the same ones mentioned in the previous section regarding the itemized deduction limitation.

Example: Kevin and Joy are husband and wife farmers who file jointly. Their joint AGI is $305,010 for 2013. The personal exemption amount for 2013 is $3,900. Kevin and Joy have a personal exemption amount for each spouse, which amounts to $7,800 (2 × $3,900) before any limitation. Because Kevin and Joy have AGI in excess of the $300,000 threshold for joint filers, their personal exemption amount will be reduced. The amount of AGI they have in excess of the $300,000 joint filer threshold is $5,010 ($305,010 - $300,000). Their personal exemption amount will be reduced in accordance with the following steps.

Step 1: Determine how many times $2,500 divides evenly into the amount of AGI in excess of the threshold and determine if there is a remainder (if $2,500 does not divide evenly into that excess income amount). If there is a remainder, the result gets increased to the next largest whole number. In this case, $5,010 ÷ $2,500 = 2.004, or 3.

Step 2: Multiply the increased result by 2% to obtain the total percentage reduction for the itemized deductions. The total percentage reduction is 3 × 2% = 6%. Kevin and Joy must reduce their personal exemption amount that would otherwise be allowable by 6%.

The $7,800 personal exemption for Kevin and Joy will be reduced by $468 (6% × $7,800).

 

Changes in Capital Gains Rates

As explained previously, ATRA creates a new top tax bracket with a 39.6% tax rate that applies to income over $400,000 for single taxpayers ($450,000 for joint filers). Among the new ATRA tax changes is an increase in the top capital gains rate from 15% to 20% that applies to those farmers in the new top 39.6% brackets. This increased capital gains rate applies to each tax year starting with 2013.