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§ 2.7 CONCEPT OF TAXABLE INCOMEThis limitation on itemized deductions is scheduled to be repealed. Thisrepeal is phased in over five years, with the otherwise applicable limitationreduced by one-third in tax years beginning in 2006 and 2007, and by two-thirdsin years beginning in 2008 and 2009. The overall limitation is to be repealed fortax years beginning after December 31, 2009. 18§ 2.6 STANDARD DEDUCTIONIndividual taxpayers, when appropriate, itemize their allowable personalexpenses as their personal deduction from adjusted gross income. As an electionin lieu of itemization, individual taxpayers are permitted to use a standard deduction.19 This feature of the federal tax law enables taxpayers to take a personaldeduction if there are insufficient itemized deductions and/or without the needfor recordkeeping to support itemized personal expenses.The standard deduction (in lieu of personal itemized expense deductions) isdeducted from adjusted gross income to arrive at taxable income as an alternativefourth step in computing and determining tax on income.§ 2.7 CONCEPT OF TAXABLE INCOMEThe term taxable income is defined by the federal tax law. 20 For taxpayers takingitemized deductions (ID), taxable income is defined as gross income minus thedeductions allowed by the federal tax law other than the standard deduction.For taxpayers electing the standard deduction, taxable income is defined asadjusted gross income (AGI) minus the taxpayer’s standard deduction (SD).Taxpayers in either category are also entitled to a personal and/or dependentexemption (P/DE). Mathematically, the formula is:AGI − ((ID or SD) + P/DE) = Taxable incomeTaxable income is the base figure on which the federal income tax is imposed.(a) Personal ExemptionEvery individual taxpayer is entitled to deduct from adjusted gross income anamount allowed as a personal exemption (unless that taxpayer can be claimed asa dependent by another taxpayer). This personal exemption is allowable forindividual taxpayers and not other taxpaying entities. Individuals filing joint taxreturns with their spouses can take two personal exemptions, one for themselvesand one for their spouse. This personal exemption amount is determined annually,with the amount adjusted for inflation. 2118 Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, 106th Cong., 1st Sess.(2001) (EGTRRA), § 103.19 IRC § 63(c). The standard deduction for 2004 for married individuals filing joint returns is $9,700; for headsof households, $7,100; for unmarried individuals, $4,850; and for married individuals filing separately, $4,850(Rev. Proc. 2003-85, 2003-49 I.R.B. 1184, § 3.10).20 IRC § 63.21 IRC §§ 151–152. The personal exemption amount for 2004 is $3,100 (Rev. Proc. 2003-85, 2003-49 I.R.B.1184, § 3.16(1)). 33