Do you remember when the elder President George Bush said, “Read my lips – no new taxes!”? Well, like the title of an old Jerry Lewis movie (“Don't Raise the Bridge, Lower the River”), Congress didn’t raise the taxes, but instead they lowered the deductions.
I am talking about what has become known as PEP and PEASE. PEP stands for “Personal Exemption Phase-out” based on a taxpayer’s Adjusted Gross Income (AGI), and PEASE refers to the reduction of itemized deductions, again based on AGI, named for Democratic Congressman Donald Pease of Ohio, who pushed for the enactment of this reduction in 1990.
Under these provisions one’s personal exemptions could be totally wiped out and up to 80 percent of a taxpayer's itemized deductions could be disallowed if their income was deemed too high.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) phased out PEP and PEASE, totally repealing them for 2010. Personal exemptions and itemized deductions are allowed in full on the 2010 Form 1040 regardless of income - there is no more reduction of these items based on your AGI.
FYI, the recently passed Tax Act extended the repeal of PEP and PEASE through tax year 2012.