The Rules for Claiming Personal Exemptions Through 2017

Personal exemptions are gone in 2018 unless you amend old tax returns

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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.

Prior to 2017's Tax Cuts and Jobs Act (TCJA), personal exemptions were one form of deduction you could use to reduce your taxable income. By reducing your taxable income, you effectively lowered the amount of income tax you'd have to pay.

However, the TCJA suspended this tax benefit—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. However, as with many aspects of the TCJA that affected personal taxes, this change is scheduled to revert to pre-TCJA status after the 2025 tax year.

The personal exemption may 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 date of filing to amend a previous year's tax return. That means you may still have the opportunity to amend 2017 returns (which were filed in 2018) to take full advantage of the personal exemption.

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 themself and one exemption for each person they could claim as a dependent.

Married people who file 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. However, 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
Year Amount
2017 $4,050
2016 $4,050
2015 $4,000
2014 $3,950
2013 $3,900
2012 $3,800
2011 $3,700
2010 $3,650
2009 $3,650
2008 $3,500
2007 $3,400
2006 $3,300
2005 $3,200
2004 $3,100
2003 $3,050
2002 $3,000
2001 $2,900
2000 $2,800

The Personal Exemption Amount Is Reduced Based on Income

Unlike standard deductions, which apply equally to all taxpayers, personal exemptions were subject to phase-out 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
Qualifying Widow(er) 313,800 436,300
Head of Household 287,650 410,150
Single 261,500 384,000
Married Filing Separately 156,900 218,150

Here's an example of how this works. Let's say 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 daughter. 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 the 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 Effect the Alternative Minimum Tax

Personal exemptions can only reduce federal income tax. They don't reduce the alternative minimum tax, sometimes called the AMT. Taxable income for AMT purposes is 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).

Let's say 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 if the family qualifies to claim each child for the child tax credit, then it increases even further—to $27,100.

Article Sources

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