What Is a Personal Exemption?

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 tax year 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 did claim you. What matters is whether or not someone could claim 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.

Before 2018, 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 is by working with a financial advisor who has tax expertise. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• 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.

Photo credit: ©iStock.com/elenaleonova, ©iStock.com/ljubaphoto, ©iStock.com/monkeybusinessimages