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.
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 some dependents who do not qualify for the child tax credit. I am leaving this article up, for people who need information for tax years 2017 and earlier, and for people who need historical information, and because I believe exemptions will return when the Democrats redo the tax code, as they surely will, since the deficit is exploding and will continue to explode for the foreseeable future, since the government is not receiving enough revenue to offset spending.
The Tax Effects of a Higher Standard Deduction and No Personal Exemptions
Under the new Republican tax plan, people who do not itemize deductions will receive a higher deduction because of the higher standard deduction, which more than compensates for the elimination of the personal exemption, which, for 2018, would have been $4100. For instance, for a single taxpayer, the standard deduction would have been $6500, so, combined with the $4100 for the personal exemption, would have yielded a $10,600 deduction. Under the new tax plan, with a higher standard deduction of $12,000, this single taxpayer would be entitled to an additional $1400 deduction.
Although taxpayers with children will lose the exemption for dependents, there is a new credit for dependents of up to $500 for each qualified dependent who is not eligible for the child tax credit. This credit phases out for taxpayers earning $400,000 per married filing jointly and $200,000 for everyone else.
Itemizers will receive less of a deduction. Prior to 2018, people who itemized instead of claiming the standard deduction could claim both itemized deductions plus the personal exemption. By eliminating the personal exemption, itemizes will lose more than $4000 of deductions. For instance, if a single taxpayer claimed $12,000 of itemized deductions, then the taxpayer could both deduct the $12,000 plus a personal exemption, which in 2018 would have been $4100. Under the new Republican tax plan, the taxpayer can only claim the $12,000 standard deduction. This won't make much difference for the wealthy, most of whom have tens of thousands of dollars of itemized deductions, but for the millions of taxpayers who claim the mortgage interest deduction, medical or dental deductions, state and local, or property taxes, charitable deductions, interest paid on money borrowed for investments, such as margin interest, or other itemized deductions, it will make a significant difference.
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:
- had no gross income
- will not file a tax return, and
- cannot be claimed as a dependent of another taxpayer
However, a spouse can never be claimed as a dependent.
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 not exceeding the income for filing requirements 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:
- citizen or resident of the United States;
- United States national; or
- resident of Canada or Mexico.
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).
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):
|Filing status||Threshold |
|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|
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:
- Excess Income = Income – Phaseout Threshold Amount
- Exemption Reduction Factor = Excess Income/$2500
- 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.
- Exemption Reduction = Personal Exemption × Exemption Reduction Factor × 2%
- Reduced Exemption = Personal Exemption – Exemption Reduction
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:
- Excess Income = $302,000 – $250,000 = $52,000
- Exemption Reduction Factor = $52,000 / $2500 = 20.8
- Round up to the next integer: 21
- Exemption Reduction = $4,000 × 21 × 2% = 1680
- Reduced Exemption = $4,000 – 1638 = $2362
If the taxpayer has any dependents, then only $2362 can be claimed for each one.