What is a personal exemption?
Understand what a personal exemption is and how you can reduce your taxable income when you claim personal exemption.
Summary
A personal exemption is a dollar amount that certain taxpayers can claim to reduce their taxable income.
Personal exemptions were suspended for tax years 2018 to 2025 but can still be claimed on prior tax years.
Your eligibility for exemptions depends on your income and the number of dependents you have, whereas deductions are based on your expenses.
A financial advisor will help you to optimize your tax strategy legally and lawfully.
What counts as a personal exemption?
A personal exemption is a dollar amount that you, as a taxpayer, may be able to deduct from your total income in order to reduce your taxable income.
You may also be eligible for exemptions on each of your dependents, including your spouse.
It’s important to note that the personal exemption was suspended (until 2025) under the Tax Cuts and Jobs Act at the end of 2017, but it still applies to 2017 and prior tax years.
Nevertheless, although the exemption amount for 2018-2025 is set at zero, your eligibility to claim an exemption may make you eligible for other active tax benefits.
Together with the standard deduction, the personal exemption served to ensure that the poorest households were exempt from paying income taxes. Personal exemptions also served to protect larger households with many dependents by reducing their tax liability.
In 2017, the personal exemption was $4,050 per person.
However, your personal exemption amount decreases in proportion with increases in your adjusted gross income (AGI), phasing out above a certain threshold ($436,300 in 2017).
With a few noteworthy exceptions, the personal exemption was available to all taxpayers.
What is the difference between a personal exemption and a deduction?
Although both deductions and exemptions aim to reduce the amount of income tax you have to pay, they are not the same.
Income tax deductions apply to a broad array of qualifying expenses and have predefined limits.
For example, you may be able to claim a percentage of expenses, such as student loan repayments, healthcare expenses, childcare expenses, and more, as deductions from your taxable income. Such deductions lower your taxable income and, therefore, the amount of tax for which you are liable.
Meanwhile, exemptions refer to a portion of your income that is entirely exempt from income tax.
In the US, there are two types of income tax exemptions – personal and dependency. Each exemption lowers the income that is subject to taxation.
Personal exemption rules typically allow you to claim yourself (and possibly your spouse). Dependency exemptions allow you to claim any other qualifying dependents that you may have.
Who can claim a personal exemption?
You can claim a personal exemption for yourself on tax returns for 2017 and earlier if:
No other taxpayer could claim you as a dependent
Your income was below the personal exemption threshold for the year in question
If you were married during the period in question, you can claim a personal exemption for your spouse if:
You are filing a joint tax return (claiming one personal exemption each for yourself and your spouse)
You are filing separately, and your spouse had zero income for that year, and no one else could claim them as dependents.
Note that the rules for claiming personal and dependency exemptions are similar to those for claiming other tax benefits, such as the child tax credit.
You can claim dependency exemptions for each of your dependents on tax returns for 2017 and earlier:
If the individual for whom you are claiming is or was a child, sibling, parent, or any other relative who resided with you and received at least 50% of their financial support from you during that period
For example, if you are filing singly for 2017 and had three children (all of whom you are claiming as dependents) at that time, you are eligible to claim a personal exemption of $16,200 ($4,050 x 4).
This claim would be valid even if one or more of your dependents were an adult, provided they lived with you and received at least half of their financial support from you - for example, an adult living with their parents while completing college.
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Although the personal exemption is not currently applicable to United States income tax returns, it is important to understand how it applies to 2017 and earlier years.
Claiming a personal exemption is one of the many ways to reduce your tax liability.
If you have yet to submit income tax returns or need to file an amended return for that period, you may be able to claim a personal exemption for yourself and your spouse. You may also be able to claim dependency exemptions for any dependents you had at that time.
It is best to consult with a tax professional to ensure that you take every possible advantage of personal exemptions and other tax benefits.
Let Unbiased match you with a qualified financial advisor for expert financial advice.
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