Taxpayers in the higher brackets will find that, even if they are entitled to one or more exemptions for dependents, they may not get the full benefit of the exemptions on their tax return. In fact, your dependency exemptions may be phased out entirely if your income is high enough.

The threshold amounts of adjusted gross income (AGI) at which you must begin to reduce your personal exemptions are adjusted each year for inflation. The amounts shown in the chart below apply for 2006.

If your income exceeds the amount at which the phaseout begins for your filing status, you have to determine the amount of the excess income, and divide it by $2,500 ($1,250 if married filing separately). Take this result and round it up to the nearest whole number. Then multiply this whole number by two percent. Your answer is the percentage by which you must reduce your otherwise allowable exemptions.

• For an example of how this works, see our case study.
• If the exemption affects you, consider minimizing the problem with some careful planning.