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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 2018 taxes, which you file in early 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. Read on to learn more about what a personal exemption is and whether or not you can claim one on your tax return.

Personal Exemptions: The Basics

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 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 may not be able to claim the entire personal exemption depending on your adjusted gross income (AGI). The personal exemption begins to phase out at a certain income threshold. For tax year 2017, the exemption 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

What Is a Personal Exemption?

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 tax year 2017.

Claiming Exemptions for Dependents

In addition to the personal exemption, you could also claim exemptions for your dependents. For tax purposes, a dependent is generally a child, parent, sibling or other relative who lives with you and receives at least half of their financial support from you.

If you’re filing a joint tax return, you could claim one exemption for yourself and one for your spouse. If you’re 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’re a single filer with two children, both of whom you were claiming as dependents. You would be able to claim a personal exemption of $12,150 ($4,050 x 3).

The Takeaway

What Is a Personal Exemption?

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 amount of exemptions you can claim does not depend on your expenses. The exemption was useful because it reduced your taxable income, but there are a couple of instances where you were not eligible to claim the personal exemption. The biggest is 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 is just thing you can use in order to reduce your tax bill.

However, the personal exemption was eliminated for the the 2018 tax year because of the tax plan passed in 2017 by Republicans and President Trump. That means you cannot claim any person exemptions on your 2018 taxes. You may still need to use the exemption if you are filing an amended return for 2017 or any year before that.

Another way to reduce the risk of paying extra taxes is by working with a financial advisor who has tax expertise. A matching tool like SmartAsset’s can help you find a person to work with who meets your needs. First you answer a series of questions about your situation and your goals. Then the program narrows down thousands of financial professionals to up to three advisors who suits your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while doing much of the hard work for you.

Tips to Maximize Savings in Tax Season

  • 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. The average American has no retirement savings and that will make it very difficult to enjoy your golden years. SmartAsset can help you plan your 401(k) contributions with 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 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

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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