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Why tax exemptions are so excellent

NOTE: This post was edited/updated on Feb. 26, 2018, to reflect 2017 tax year numbers and changes coming due to the new tax law's changes for the 2018 through 2025 tax years.

Every taxpayer's situation is different, but there are a few tax rules that apply to almost every person who has to file a return.

One of the most welcome is the tax exemption.

Family jumping_Emergency Brake via Flickr CC
This family will likely jump for joy again when they see how much personal exemptions will save them on their tax return. (Photo by Emergency Brake via Flickr Creative Commons)

Like deductions, an exemption helps reduce your adjusted gross income (AGI) to a smaller taxable income amount. The less money that the IRS can tax, generally the smaller your eventual tax bill.

But the exemption amount is in a tax class all its own.

However, due to tax code changes in the recently enacted Tax Cuts and Jobs Act, exemptions will not affect tax returns for the 2018 through 2025 tax years.

For your 2017 return, however, that you're working on now, you can claim exemptions. Here's how.

Personal and dependent exemptions: There are two types of exemptions, personal exemptions and exemptions for dependents.

Each is worth the same amount, which is adjusted annually for inflation

For 2017 tax returns due April 17, 2018 (yes, it's late again this year, again because of the normal deadline falling on a weekend and Emancipation Day holiday), each exemption you can claim will reduce your AGI by $4,050.

You almost always count: In most filing instances, you get to claim a personal exemption for yourself.

The only time this isn't allowed is when you file a return but someone else is entitled to claim you as a dependent exemption. This might be the case, for example, where a college student earned enough money to require filing of a tax return, but his or her parents can claim the young student as a dependent. (Revised to reflect good points made by Mary O'Keefe in the comments section below. Thanks, Mary!)

There are various circumstances where a dependent might be required to (or want to) file a return. It depends on several factors, such as the amount of your income, your marital status and any special taxes you owe.

If your filing falls into one of these cases, be sure to find out who might be claiming you as a dependent exemption so that you don't improperly claim a personal exemption for yourself.

Spousal exemptions: If you're married and file a joint return -- and thanks to the June 26, 2015, U.S. Supreme Court ruling in Obergefell v. Hodges, this tax filing status applies to gay and lesbian married couples, too -- you can claim a personal  exemption for yourself and one for your spouse.

Exemptions for dependents: You generally can take an exemption for each of your dependents, which for most taxpayers are the young children for whom they cared during the tax year.

Be sure to list the Social Security number of any dependent for whom you claim as an exemption.

And be sure to check out the tax requirements of claiming a child or other relative (which, per the Internal Revenue Service, is a broad definition) as an exemption.

Limited exemptions for some: The one down side to exemptions comes if you make a lot of money.

If you make more than a certain amount, again adjusted each year for inflation and determined by your tax filing status, the exemption amount you can claim is reduced. In fact, you could even lose your exemptions altogether.

This is known as the personal exemption phaseout, or PEP.

For For the 2017 tax year, the returns you are or soon will be working on and which are due by April 17, 2018, the PEP income earnings threshold for phasing out or elimination exemption claims are:


Filing Status
 
2017 exemption
phaseout begins 
2017 exemption
eliminated
 
Single $261,500 $384,000
Head of Household  $287,650 $410,150
Married Filing Jointly $313,800 $436,300
Qualifying Widow/Widower (Surviving Spouse)   
$313,800
 
$436,300
Married Filing Separately  $156,900 $218,150

 

Literally looking at exemptions: You also can get an idea of how exemptions (and the standard deduction) have helped out taxpayers over the years in the infographic below from the folks at TurboTax.

standard deductions personal exemptions
Free Tax Filing, Efile Taxes, Income Tax Returns - TurboTax.com
Click on the image to get a bigger view.

You'll notice 2012 dates for the examples. That's when the infographic originally was created and posted. But the process remains the same, at least through filing 2017 tax returns.

You also might find these items of interest:

Comments

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Kay

Thanks, Mary, for making that important distinction. Kay

Mary OKeeffe

I feel the need to expand/clarify upon something you wrote above:

"In most filing instances, you get to claim a personal exemption for yourself.

The only time this isn't allowed is when you file a return but someone else claims you as a dependent exemption."

I agree with the first sentence, but not exactly with the wording of the second sentence.

I would modify the second sentence to read: "The only time this isn't allowed is when you file a return but someone else *is entitled to claim* you as a dependent exemption."

Many of our VITA clients come in and say, "My parents are not claiming me on their return, so I can claim myself."

We have to stop them and say--"Let's slow down a little here. Just because your parents don't claim you does NOT necessarily mean you can claim yourself. First, we need to determine whether your parents [or another person] *could* have claimed you as their dependent. If another taxpayer could have claimed you, then you may *NOT* claim yourself, even if they chose not to claim you."

On the other side of the coin, taxpayers will often come in and say, "My parents already claimed me on their return, so I can't claim myself." When we look at their facts and circumstances, we may determine that it would have impossible for another person to claim them (example: if they are over 19, not a full-time student for at least five months, not disabled, and earned more than $3,700 in gross income in 2011). In that case, we tell the taxpayer that they are entitled to claim themselves if they choose to do so, and they should respectfully inform their parents that they made a mistake on their returns in claiming them.

Terry

So much for fairness in the tax code.

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