Personal and Dependency Exemptions

No matter how bad a child is, he is still good for a tax deduction. — American Proverb

Because people with children have greater expenses than those without, the tax law reduces their tax liability by allowing them to claim exemptions for themselves and any dependents. A taxpayer who cannot be claimed as a dependent by another can claim a personal exemption, which is adjusted annually for inflation, plus an additional exemption for each dependent. The personal exemption and the exemption for each dependent is equal.

Year Exemption
2018 $4,150
2017 $4,050

Being able to claim a dependent exemption for a child also qualifies you to claim the child tax credit, which is worth up to $1000 per child, some educational tax credits, or to deduct up to $2500 of interest on college loans for that child. Additionally, you would qualify for a higher earned income credit.

If married filing jointly, a personal exemption can be claimed for a spouse, but if you file separately, then you can only claim an exemption for your spouse if your spouse:

However, a spouse can never be claimed as a dependent.

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To claim the dependency exemption, the dependent must satisfy the requirements for a qualifying child or a qualifying relative; the main requirement is that the taxpayer claiming the dependent must have provided more than ½ of the dependent's support during the tax year. Note that if you can claim a dependent, then that dependent cannot claim a personal exemption, even if you do not actually claim the dependent.

When claiming deductions for dependents, the correct Social Security number or taxpayer identification number of each dependent must be listed on the return of the taxpayer claiming the deduction; otherwise, it will be denied.

If the taxpayer claims someone as a dependent, then the dependent cannot also claim the personal exemption. Dependents with income equal to or less than $950 will not be taxed and do not have to file income tax returns. Joint filers can claim 2 personal exemptions, even if one spouse has no income. If they file separate returns, then each can claim their own personal exemption. However, if one of the spouses earns no income and cannot be claimed as a dependent by anybody else, then the income earning spouse filing separately can claim the exemption of the nonworking spouse.

A dependent must also meet the resident or citizen test at least some time during the year when the dependency exemption is claimed. The dependent must be a:

If any the dependents do not have either a social security number or an individual taxpayer identification number, then the taxpayer who wants to claim the exemption should file Form SS-5, Application for a Social Security Card with the Social Security Administration, or Form W-7, Application for IRS Individual Taxpayer Identification Number with the IRS if the dependent does not qualify for a social security number, usually because the dependent is a resident or non-resident alien.

On Form 1040 or 1040A, U.S. Individual Income Tax Return, exemptions are totaled and multiplied by the exemption amount, which is then subtracted from adjusted gross income. However, the personal and dependency exemptions are not available under the alternative minimum tax (AMT).

Starting in 2018, under the new tax package passed by the Republicans at the end of 2017, known as the Tax Cuts and Jobs Act, the personal exemption is completely eliminated, . However, the standard deduction is nearly doubled, the child tax credit is doubled, with up to $1400 being refundable, and a $500 credit can be claimed for dependents other than children.

Personal Exemption Phaseout

Previous to 2010, there was a phaseout of personal exemptions for taxpayers whose adjusted gross income was greater than a certain amount. However, there was no phaseout for 2010-2012, so higher income taxpayers could claim the full amount of the personal exemption for those years.

However, starting in 2013, there is a phase-out amount for claiming personal and dependent exemptions, which is often referred to as the personal exemption phaseout, or PEP, limit:(also known as the Pease limits):

Income Thresholds for the PEP Limit
2018 2017
Filing status Threshold
Single $266,700 $389,200 $250,000 $372,500
Head of Household $293,350 $415,850 $287,650 $410,150
Married Filing Jointly $320,000 $442,500 $313,800 $436,300
Married Filing Separately $160,000 $282,500 $156,900 $279,400
  • Adjusted annually for inflation.
  • The phaseout amount is $122,500 above the threshold amount, except for married filing separately, which is half that.
  • These phaseout amounts are the same for itemized deductions.
  • Note that the 2018 figures are no longer relevant, since the Republicans eliminated personal exemptions, but these figures show what the PEP limit would have been, if the law was not changed.

The total exemptions that can be claimed are reduced by 2% for each $2,500, or portion thereof, ($1,250, married filing separately) over the threshold amounts. To calculate the reduced exemption:

  1. Excess Income = Income – Phaseout Threshold Amount
  2. Exemption Reduction Factor = Excess Income/$2500
  3. Round up the Exemption Reduction Factor to the next integer, even if there is no remainder.
    • So, for example, even if Excess Income/2500 = 10 exactly, then Exemption Reduction Factor = 11.
  4. Exemption Reduction = Personal Exemption × Exemption Reduction Factor × 2%
  5. Reduced Exemption = Personal Exemption – Exemption Reduction
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Example: Calculating the Reduced Personal and Dependency Exemption for High-Income Taxpayers

A single taxpayer earns $302,000, so if the personal exemption = $4,000, then it must be reduced by the reduced exemption amount, calculated thus:

  1. Excess Income = $302,000 – $250,000 = $52,000
  2. Exemption Reduction Factor = $52,000 / $2500 = 20.8
  3. Round up to the next integer: 21
  4. Exemption Reduction$4,000 × 21 × 2% = 1680
  5. Reduced Exemption = $4,0001638 = $2362

If the taxpayer has any dependents, then only $2362 can be claimed for each one.