Under the tax reform bill that passed into law at the end of 2017, the personal exemption was eliminated. This means you cannot claim it on your taxes starting with the tax year 2019.So the following information on the personal exemption only applies if you are filing a return for a tax year that was 2017 or earlier. Let’s break down how a personal exemption is defined and whether you can claim one on your tax return.
A financial advisor can help optimize your financial plan to lower your tax liability.
What a Personal Exemption Is
A personal exemption was a specific amount of money that you could deduct for yourself and for each of your dependents. Regardless of your filing status is, you qualify for the same exemption. For the tax year 2017 (the taxes you filed in 2018), the personal exemption was $4,050 per person.
The personal exemption was available to all taxpayers, with a couple of notable exceptions. If someone else could claim you as a dependent, you couldn’t claim the personal exemption. Note that it doesn’t matter if someone else actually didclaim you. What matters is whether or not someone couldclaim you.
You also might not have been able to claim the entire personal exemption depending on your adjusted gross income (AGI). The personal exemption would begin to phase out at a certain income threshold. For the tax year 2017, the exemption was reduced for single filers who had an AGI above $262,500. The exemption phased out entirely if your AGI was over $384,000. The exemption started to phase out for joint filers who had an AGI of $313,800. It phased out entirely if your AGI was above $436,300.
Exemptions vs. Deductions
Exemptions and deductions both reduce your taxable income. But they’re not the same thing. The number of exemptions you can claim depends on your filing status and the number of dependents you have. The kinds of deductions you can claim, however, depend on your expenses. For example, if you’re paying off your student loans, you may qualify for the student loan interest deduction.
You could only claim an exemption for yourself if no one else could claim you as a dependent on their tax return. In addition to claiming a personal exemption, you could also take the standard deduction if you weren’t itemizing your deductions. The standard deduction is a set amount of money that you can deduct each year. Your standard deduction varies depending on your filing status.
As an example, if you were a college student and your parents planned to claim you on their tax returns as a dependent (because they provided more than half of your financial support), you wouldn’t be able to claim an exemption for yourself. But you would still be eligible for the standard deduction, which was $6,350 for single filers in the tax year 2017.
Claiming Exemptions for Dependents
While you cannot claim personal and dependent exemptions after 2018, the rules for claiming other tax benefits for dependents like the child tax credit can be applied.
For tax purposes, a dependent is generally a child, parent, sibling or another relative who lives with you and receives at least half of their financial support from you.
Before 2018, if you were filing a joint tax return, you could claim one exemption for yourself and one for your spouse. If you were filing separate returns, however, you could only claim an exemption for your spouse if they had no gross income for the year and no one else was claiming them as a dependent.
To give you a simple example, let’s say you were a single filer with two children, both of whom you were claiming as dependents. You would have been able to claim a personal exemption for tax year 2017 of $12,150 ($4,050 x 3).
Bottom Line
A personal exemption is an amount of money that you could deduct for yourself, and for each of your dependents, on your tax return. The personal exemption, which was $4,050 for 2017, was the same for all tax filers. Unlike with deductions, the number of exemptions you could claim did not depend on your expenses.
The exemption was useful because it reduced your taxable income, but there are a couple of instances in which you were not eligible to claim the personal exemption. The biggest was when someone could claim you as a dependent. There was also an income threshold above which you would receive either a reduced exemption or no exemption at all. Ultimately, the personal exemption was useful for reducing your tax bill.
However, the personal exemption was eliminated for the 2018 tax year because of the tax plan passed in 2017. That means you cannot claim any personal exemptions on your 2018 taxes or beyond. You may still need to use the exemption if you are filing an amended return for 2017 or any year before that.
Tips to Maximize Savings in Tax Season
- Another way to reduce the risk of paying extra taxes isby working with a financial advisor who has tax expertise. Finding a financial advisor doesn’t have to be hard.SmartAsset’s free toolmatches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You can reduce your tax bill by reducing your taxable income. One way to do that is to contribute to a pre-tax plan like a 401(k) or IRA. This would have the added effect of helping you to save for retirement. Theaverage American has no retirement savingsand that will make it very difficult to enjoy your golden years. SmartAsset can help youplan your 401(k) contributionswith this free calculator.
- Individuals may need to pay a 3.8%Net Investment Income Tax (NIIT) if they have investment incomes and a salary over $200,000 ($250,000 for joint filers). Investing is a great way to build wealth but it can result in high tax bills if you don’t plan things well.
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Tax Reform Bill of 2017: Elimination of Personal Exemption
Under the tax reform bill of 2017, the personal exemption was eliminated. This significant change means that starting from the tax year 2019, individuals cannot claim the personal exemption on their taxes. Therefore, any information regarding the personal exemption in the provided article is applicable only to tax years 2017 or earlier.
Personal Exemption Defined:
The personal exemption was a specific amount of money that taxpayers could deduct for themselves and each of their dependents. For the tax year 2017, this amount was $4,050 per person. However, certain conditions applied:
- If someone else could claim you as a dependent, you were ineligible to claim the personal exemption.
- The personal exemption phased out based on adjusted gross income (AGI). For example, in 2017, it began to phase out for single filers with an AGI above $262,500, and it phased out entirely for an AGI over $384,000.
Exemptions vs. Deductions:
Exemptions and deductions both reduce taxable income, but they differ. Exemptions depended on filing status and the number of dependents, while deductions are based on expenses. The standard deduction is a set amount that varies by filing status and can be claimed if not itemizing deductions.
Claiming Exemptions for Dependents:
Before 2018, individuals could claim exemptions for dependents, such as children or relatives living with them. The article emphasizes the importance of understanding who qualifies as a dependent and the conditions for claiming exemptions, especially in joint or separate tax returns.
Elimination of Personal Exemption and Beyond:
The article concludes by highlighting that the personal exemption was eliminated for the tax year 2018 and beyond due to the 2017 tax plan. However, individuals may still need to use the exemption if filing an amended return for tax years 2017 or earlier.
Tips to Maximize Savings and Net Investment Income Tax (NIIT):
The article provides additional tips for maximizing savings during the tax season, such as working with a financial advisor, contributing to pre-tax plans, and being aware of the Net Investment Income Tax (NIIT) for individuals with high investment incomes and salaries over specific thresholds.
In summary, the provided article covers the definition and phases out of the personal exemption, distinctions between exemptions and deductions, claiming exemptions for dependents, the elimination of the personal exemption after 2017, and tips for tax planning and savings. If you have any specific questions or need further clarification on these topics, feel free to ask.
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