What is a 'Personal Exemption'

The personal exemption was a federal income tax break up until 2017. The elimination of the personal exemption for tax years 2018 to 2025, was done through the Tax Cuts and Jobs Act of 2017. The exemption was earmarked for a subsistence level of income which was untaxed and gave an exemption for each person the taxpayer supported. The taxpayer could claim the personal exemption for themselves, their spouse, and qualifying dependents.

Between 2018 and 2025, there is no personal exemption due to new tax legislation. However, the standard deduction is about double for that period.

BREAKING DOWN 'Personal Exemption'

The personal exemption was figured by counting up all eligible family members and multiplying by a per exemption dollar amount as claimed by the filing status. A single filer could claim one personal exemption for themselves. Head of household filers got themselves and could claim each dependent. Those filing jointly received credit for themselves, their spouse, and each qualified dependent. Finally, married filing separately taxpayers could claim themselves, dependents and spouse, as long as the spouse had zero gross income and was not claimed as a dependent by any other taxpayer. The claim an exemption for a dependent,  they must be a qualifying child or a qualifying relative.  

The personal exemption was subject to a phaseout (PEP) that gradually reduced the personal exemption of high-income taxpayers by 2% for each $2,500 or fraction of adjusted gross income (AGI) exceeding $261,500 for single filers, $287,650 for a head of household filers, and $313,800 for joint filers.

Personal exemption was a below-the-line deduction subtracted from adjusted gross income (AGI) to reduce taxable income and, ultimately, taxes in proportion to your tax bracket. This reduction in taxable income meant its value varied with your marginal tax rate.  If you had a $4,050 personal exemption, your tax savings would be $608 in a 15% bracket and $1,418 in a 35% bracket.  This value disparity increases as the income tax become more progressive.

RELATED TERMS
  1. Exemption

    A deduction allowed by law to reduce the amount of income that ...
  2. Over-55 Home Sale Exemption

    A former law known as the over-55 home sale exemption provided ...
  3. SEC Form T-4

    An application for exemption from certain sections of the Trust ...
  4. Waiver Of Exemption

    A provision in a consumer credit contract or loan agreement that ...
  5. Tax Bracket

    A Tax Bracket is the rate at which an individual is taxed. Tax ...
  6. Alternative Minimum Tax - AMT

    AMT is designed to prevent taxpayers from using breaks to escape ...
Related Articles
  1. Taxes

    Are You Missing Out On These Tax Exemptions?

    To lower your tax bill, make sure that you're taking all the exemptions that apply to you.
  2. Financial Advisor

    5 Top Tax Concerns Clients Face

    Clients of advisors may have more tax issues as their financial plans become more complicated.
  3. Financial Advisor

    Tax Time is Coming; Don't Be Caught Off Guard

    It's time to think about tax returns again. The good news is that the regulations in 2016 have not changed dramatically from last year.
  4. Taxes

    Who Would Trump's Tax Plan Hit the Hardest? Single Parents

    Single parents can expect a tax increase under Trump's proposed tax plan.
  5. Taxes

    The Impact of New Tax Code on Financial Planning

    Here's how the Tax Cuts and Jobs Act will impact financial planning.
  6. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  7. Retirement

    2017 COLA Adjustments: An Overview

    These are the key cost of living adjustments you need to know for 2017.
  8. Financial Advisor

    2016 Tax Code Changes Add Some Wiggle Room

    It's never too early to prepare for tax season. Next year features a host of tax law changes. Check our handy list to see which ones apply to you.
  9. Taxes

    How Trump’s Proposals Will Impact Your Taxes

    How Trump's proposed tax changes could affect your taxes depends on your current tax bracket.
  10. Taxes

    The Tax Cuts and Jobs Act (TCJA) and Your Taxes

    Learn how the Tax Cuts and Job Act (TCJA) tax reform bill affects your finances.
RELATED FAQS
  1. What is the difference between taxable income and gross income?

    Learn the basic differences between the terms gross income and taxable income, and what is included in the total of each ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center