The U.S. tax code is progressive, meaning that the more you make, the higher your tax rate. However, for more than 20 years, the tax code also included provisions that cost higher-income individuals a bit more when they filed their returns.
The personal exemption phaseout, or PEP, reduced the amount a taxpayer could claim personally, as well as the allowable exemptions for a spouse and dependents.
When that higher-income taxpayer also itemized deductions, a portion of those tax breaks also were disallowed under the Pease rule, named for U.S. Rep. Edward Pease, who championed the reduction. Under this phaseout, some taxpayers lost as much as 80 percent of their itemized deductions.
However, between 2006 and 2009, the Bush-era tax cuts gradually phased out these phaseouts. In 2010, there are no limits on personal exemption or itemized deduction claims regardless of a taxpayer's income.
In 2011, though, the phaseouts for wealthier taxpayers return.
If you expect to be in a high tax bracket next year, take full advantage of this tax year's lack of limits on itemized deductions. A charitable donation made in 2010 could be significantly more valuable to folks now than it might be if made in 2011 or later.