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Personal Exemptions No Longer Deductible

Personal Exemptions No Longer Deductible

Tax preparation is a sore spot for many people. It is hard work that requires many intricate details. Sadly, the rules change without prior notice from the government and for many Americans preparing for the next tax season, it could be frustrating.

This can be traced to the enormous reforms made by congress. There are new rules and some old rules scrapped or changed and these changes could either benefit taxpayers or even frustrate them.

Personal exemption can be likened to a lifesaver for many taxpayers and this is because taxpayers could remove thousands of dollars from their taxable income. The implication of this is overall reduced tax and even though other measures were designed to ‘checkmate’ the personal exemption effect, not all taxpayers enjoyed this.

This means that many taxpayers with personal exemptions took a hit, while others ended up ahead.

Personal Exemption: How It Worked 

The personal exemption is one of the few tax laws that was easy to understand. After filing a tax return, the law allows you to claim an exemption for you and your spouse provided you filed jointly. 

There is also the provision to claim an exemption for your kids and another dependent. Every exemption you claimed translated to a $4,050 reduction in taxable income. This means that a couple with three kids could reduce their taxable income by as much as $20,250.

The value of the deduction, however, is a factor of your tax bracket. Taxpayers at the bottom of the earning income had personal exemption translated into simple savings. Since a tax rate of 10% is considered fair enough, on the other hand, top earners could enjoy as much as $1600 deduction or more from their tax bill.

The Implication of the Tax Reform

With the new tax law enacted in 2018, lawmakers got rid of personal exemptions. However, the good news is that they made a couple of provisions that ‘checkmated’ the negative impact of removing personal exemptions.

  1. They increased the standard deduction. For single filers, their standard deduction almost doubled, from $6,350 to $12,000. For double filers as well, it went from $12,700 to $24,000. The increase with each category (5,650 and $11,300) simply translated to approximately one and a half personal exemption for single filers. Joint filers had as much as three exemptions.

People with few exemptions in the old law will be way ahead with this new tax reform. People with more exemptions, however, were not so lucky.

  1. They also made some reforms to the child tax credit. This involved expanding the size and increasing the category of people that can enjoy this. With the old law, parents with kids 16 years and below could enjoy a thousand dollars deduction in tax liability. This amount was doubled. 

In the same way, the income limits that can enjoy the credit got a boost. The table below sheds more light

Filing Status 

Old Law Income Limit

New Law Income Limit

Single, Head of Household, or Widow(er)

$75,000

$200,000

Married Filing Jointly

$110,000

$400,000

Married filing separately

$55,000

$200,000

Source of Data: IRS

Anything beyond this credit limit translated to a $50 loss for every extra $1,000 income you had. This new law allowed many individuals that didn't qualify for the credit before.

What will be Your Fate?

This tax reform could leave some category of taxpayers worse off. These are:

  1. Taxpayers with huge families

  2. Taxpayers with kids that are too old and not qualified for the child tax credit. They are, however, still young to provide personal exemptions. Children in these categories are between 17 and 18 years old—children that are students, and between 19 and 23.

  3. Also, people that itemized with the old law and wanted to keep up with it as well. Such taxpayers will not enjoy personal exemption, which could have translated into a reduction in taxable income. 

On the other hand, as well, some taxpayers will benefit from this change. Taxpayers that qualify for colossal tax credit and standard deductions will not have much blow-back from the law. The reform might, however, be harsh for people that cannot enjoy those ‘checkmating’ benefits.


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