It might not feel like it at tax time, but the Internal Revenue Service doesn't actually tax you on every single dollar you earn. The Internal Revenue Code offers numerous deductions and credits you can use to shave away some of your tax liability every year.
Personal exemptions were one form of deduction you could use to reduce your taxable income prior to 2018's Tax Cuts and Jobs Act (TCJA). You effectively lowered the amount of income tax you'd have to pay by reducing your taxable income.
The TCJA suspended this tax benefit, however—at least for the time being. Keep reading to learn more about how the personal exemption used to work, how the TCJA changed the situation, and what similar tax breaks still exist.
The Personal Exemption Was Removed in 2018
The personal exemption was suspended from the tax code when the TCJA went into effect in 2018. As with many aspects of the TCJA that affected personal taxes, however, this change is scheduled to revert to pre-TCJA status after the 2025 tax year unless Congress takes steps to renew the legislation.
The personal exemption might not necessarily return after the 2025 tax year. Congress has the option of renewing that and other temporary aspects of the tax law.
Generally, you have three years from the original date of filing to amend a previous year's tax return. That means time has run out if you are seeking to amend a return for tax year 2017 (and years previous).
Who Was Eligible?
All tax breaks come with a whole list of rules for claiming them, and personal exemptions were no exception. A taxpayer was permitted to claim one personal exemption for themselves and one exemption for each person they could claim as a dependent.
Married people who filed jointly could claim two personal exemptions, one for each spouse, plus exemptions for each of their dependents. If they filed separately, however, one spouse could claim the other spouse's personal exemption only if the other spouse met certain requirements, such as earning no gross income throughout the year.
You could not claim a personal exemption for yourself if you were someone else's dependent because that taxpayer was already claiming your personal exemption. Even if you weren't claimed as a dependent—but you or your spouse could've been claimed as a dependent by someone—you did not qualify to claim a personal exemption for yourself or your spouse.
How Much Was the Personal Exemption Worth?
Like many aspects of taxes, the personal exemption amount was indexed for inflation—it increased slightly most years to keep pace with the economy. But if the economy remained relatively steady and inflation was low, the personal exemption amount stayed the same. This happened in tax years 2016 and 2017 when it remained steady at $4,050 two years in a row.
Here's how the exemption worked out in previous years:
|Historical Personal Exemption Amounts|
The Personal Exemption Amount Is Reduced Based on Income
Unlike standard deductions, which apply equally to all taxpayers, personal exemptions were subject to phaseout limits called the "personal exemption phaseout" (PEP).
Phasing out means that the exemption gradually reduces as a taxpayer's income increases. Every $2,500 a taxpayer earned above a set threshold reduced their personal exemption by 2%. The reduction could be applied fractionally to amounts that exceeded the threshold by less than $2,500. The personal exemption phased out by 2% for each $1,250 of adjusted gross income over the threshold for people who used the married-filing-separately status.
|Phaseout Range for Personal Exemptions for 2017|
|Filing Status||Phaseout Begins||Phaseout Ends|
|Married Filing Jointly||$313,800||$436,300|
|Head of Household||287,650||410,150|
|Married Filing Separately||156,900||218,150|
Here's an example of how this works. Suppose Darla had an adjusted gross income of $300,150 in 2017. She filed as head of household and claimed two personal exemptions, one for herself and one for her child. The relevant threshold for 2017 was $287,650 for head of household filers. Darla's adjusted gross income of $300,000 exceeded this threshold by $12,500.
We take this excess amount and divide it by $2,500, which comes out to five. We must therefore reduce her personal exemptions by 2% for each $2,500, which works out to five reductions of 2% for a total of 10%.
Darla's two personal exemptions totaled $8,100 before the reduction. Multiply that by 10% to get the reduction amount—$810. Therefore, the $8,100 exemption becomes a $7,290 exemption ($8,100 less $810).
The phase-out limits did not apply in 2010, 2011, or 2012.
How to Claim Personal Exemptions
Personal exemptions show up in two places on 2017 tax returns and those for previous years, first on page 1 of Form 1040. Line 6 has a space where you can indicate whether you're claiming personal exemptions for yourself, your spouse, and/or for your dependents.
Next, the deductible amount of your personal exemptions shows up on the second page on line 42, or on line 26 if you file Form 1040-A. Personal exemptions show up in just one place, on line 5, for taxpayers who file Form 1040-EZ.
Because the personal exemption was eliminated starting in tax year 2018, subsequent versions of Form 1040 do not include a line to enter a personal exemption.
Exemptions Don't Affect the Alternative Minimum Tax
Personal exemptions can only reduce federal income tax. They didn't reduce the alternative minimum tax, sometimes called the AMT. Taxable income for AMT purposes was calculated without regard to personal exemptions.
TCJA Standard Deductions
With the suspension of personal exemptions, it might seem like the average family would start handing over a lot more in tax dollars beginning in 2018. However, the TCJA nearly doubled the standard deduction, and it increased the Child Tax Credit to $2,000 (though the Child Tax Credit has a phase-out income threshold).
The Child Tax Credit increases to $3,600 for children under the age of six, and to $3,000 for children age six through age 17, for tax year 2021. The American Rescue Plan Act, signed into law by President Biden in March 2021, provides for this special, one-year rule.
Suppose a qualifying family of four was able to subtract $16,200 off their income by claiming personal exemptions in 2017. That same family will be able to claim a standard deduction of $25,100 for married couples in tax year 2021 (up from $24,800 in tax year 2020). That's already more than the family's personal exemption in 2017, and it increases even more—to $31,100—if the family qualifies to claim each child under the 2021 rules for the Child Tax Credit, and they're both over age six.
Frequently Asked Questions (FAQs)
How can I reduce my taxable income?
Even though personal exemptions no longer exist under the TCJA, there are still numerous ways to lower your taxable income. For many taxpayers, the increased standard deduction will provide a significant reduction in taxable income. If you have enough deductions to itemize more than the standard deduction, you can also lower your income in that way. Even if you choose the standard deduction, you may also be able to deduct contributions to a traditional IRA, contributions to a health savings account, a portion of self-employment tax, and more.
What are tax exemptions?
Tax exemptions are a broad term for various types of income tax exclusions that individuals and businesses can claim for a portion or all of their income. These exemptions lower your taxable income, thus reducing your tax liability. They differ from tax credits, which directly reduce the amount of taxes you owe.
What tax exemptions can I still claim?
The 2017 TCJA eliminated personal exemptions for tax years after 2018, but you can still claim a variety of deductions and other tax exclusions, including a higher standard deduction, various above-the-line deductions, and an expanded child tax credit.
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