What Does a Personal Exemption Mean for Your Taxes?

A personal exemption was a specific dollar amount that taxpayers could deduct from their income for themselves, their spouse, and each qualifying dependent they claimed. The exemption’s purpose was to reduce a taxpayer’s adjusted gross income (AGI). Lowering AGI decreased the amount of income subject to tax, which in turn lowered an individual’s overall tax liability.

How Personal Exemptions Functioned

A taxpayer was entitled to claim one exemption for themself and, if filing a joint return, one for their spouse. For example, in tax year 2017, the exemption amount was $4,050 per person. A married couple filing jointly would have been able to deduct $8,100 from their AGI just for themselves.

This benefit extended to dependents, allowing taxpayers to claim an additional exemption for each qualifying child or relative. These dependency exemptions followed specific IRS rules related to age, relationship, residency, and financial support. A family of four in 2017 could have claimed four exemptions, totaling $16,200, lowering their taxable income before any other deductions or credits were applied.

The value of this deduction was not unlimited for all taxpayers. A rule known as the Personal Exemption Phase-out (PEP) reduced the total exemption amount for higher-income individuals. In 2017, this phase-out began for single filers with an AGI of $261,500. As income rose above this threshold, the value of the exemptions gradually decreased, eventually reaching zero for the highest earners.

The Elimination of Federal Personal Exemptions

The Tax Cuts and Jobs Act of 2017 (TCJA) suspended both personal and dependency exemptions at the federal level. The law reduced the exemption amount to zero, effectively eliminating it from the Form 1040 tax return.

This change went into effect for tax year 2018 and is scheduled to remain in place through tax year 2025. Unless Congress acts to extend the provision, the personal exemption is set to return in 2026, adjusted for inflation. The change was intended to simplify the tax code by removing this deduction in favor of other tax benefits.

What Replaced Personal Exemptions

To offset the removal of the personal exemption, the TCJA introduced changes to other parts of the tax code, including a near-doubling of the standard deduction. For example, the standard deduction for a married couple filing jointly increased from $12,700 in 2017 to $24,000 in 2018. This higher standard deduction serves a similar purpose to the personal exemption by reducing the amount of income subject to tax.

The law also expanded tax benefits for families with children. The Child Tax Credit was doubled from $1,000 to $2,000 per qualifying child, with a portion of it becoming refundable, meaning a taxpayer could receive it even if they owed no income tax. For dependents who do not qualify for this credit, such as college students or elderly relatives, the TCJA created a new non-refundable Credit for Other Dependents, valued at $500.

It is important to understand the difference in how these new provisions work. A deduction, like the standard deduction, reduces your taxable income. A credit, on the other hand, reduces your final tax bill on a dollar-for-dollar basis. This shift from exemptions to credits was intended to provide a more direct tax benefit to families.

State-Level Personal Exemptions

While personal exemptions have been eliminated at the federal level, some states continue to offer their own personal and dependency exemptions. These states did not conform their tax laws to the changes made by the TCJA and maintain their own exemption structures.

The rules, eligibility requirements, and exemption amounts vary significantly from one state to another. To determine eligibility for a state-level personal or dependency exemption, individuals should consult their state’s department of revenue website or seek guidance from a qualified tax professional.