Most of the people find it difficult to understand the tax rules because they are unable to comprehend the terms written on the IRS website. Tax payers need to understand the terms so that they can easily file the tax returns. There are many hidden shadow taxes which cannot be understood unless you know details about them. One of the shadow taxes is PEP. It was introduced during the presidency of Bill Clinton. The purpose of PEP tax is to reduce the deductions of certain tax payers when their income increases. In this way, there was a huge increase in tax returns at the time of President Bill Clinton.
What does PEP stand for? PEP stands for Personal Exemption Phase-out. The personal exemption is the fixed amount of tax deduction given by law. It means that if you have four people in the family, you will get a tax deduction of a fixed amount that is adjusted for inflation for each member. This is sort of a relief given to given by the congress.
Bill Clinton’s administration changed the rules a bit. They decided that if an individual is earning a certain amount of income he will not get the advantage of the personal exemption. So, once taxpayers reached a certain level of adjusted gross income, their personal exemptions began disappearing.
It can be concluded that if you are a high-income earner, the government believes that you don’t need personal tax exemptions because you can afford to pay the taxes.
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