What happens to one’s AGI if it exceeds certain thresholds related to the exemption amount?

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When an individual's Adjusted Gross Income (AGI) exceeds specific thresholds, it triggers a reduction in the personal exemption amount. The mechanism for this reduction is quite precise: for every $2,500 that AGI exceeds the threshold, the exemption amount is reduced by 2%. This systematic phasing out ensures that higher-income taxpayers receive less benefit from personal exemptions, aligning with tax policies aimed at equitable distribution of tax burdens.

This reduction continues until the exemption is completely phased out based on the income level, impacting the taxpayer's overall deductions and potentially increasing their taxable income. Understanding this nuance is crucial for tax preparers as it directly influences tax liability and planning strategies for clients with AGI near these thresholds.

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