I Used To Be Able To Take A $4,000 Exemption For Each Person In My Family – Why Can’t I Do That Anymore?

One of the biggest changes to the individual tax code that was codified in the new tax law was the elimination of a tax benefit called the personal exemption. The exemption was available to all people within a household and served to lower the taxable income for a family (or individual). In 2017, the personal exemption per person was $4,050. That means that an individual used to be able to subtract $4,050 from their taxable income and a family of five used to be able to subtract $20,250 (5 times $4,050). This exemption was available both to taxpayers who itemized their deductions and those who took the standard deduction. The new tax law eliminated these exemptions entirely.

Will I pay more in taxes due to the elimination of the personal exemption?

It depends who you are, and what your tax situation is, but if you have children, your taxable income will almost certainly go up, and you could see an increase in your taxes due to the elimination of the personal exemption.

• How did the personal exemption work under the old law? When filing taxes, you are faced with a lot of choices. The biggest one is if you are going to itemize your deductions, or simply take the standard deduction. Opting for the standard deduction means that you lose out on special deductions for various line items on your tax filing, such as the deduction for charitable giving, or the deduction for mortgage interest, and many others. One of the big exceptions to that rule under the old law was that everyone was allowed to decrease their total taxable income by the amount of the personal exemption – one per person in a given household. That meant that you could take the standard deduction, forgoing the various benefits that went with itemizing, but still get the benefit of the personal exemption. If you were single, you could use the standard deduction to reduce your taxable income by $6,350 and use the personal exemption to reduce your taxable income further by $4,050, for a total reduction of $10,400. If you were married, you could deduct $12,700 using the standard deduction, and $4,050 + $4,050 in personal exemptions for you and your spouse, for a total reduction of $20,800.

  The personal exemption benefit did get phased out for a small share of people at higher-income levels, but the vast majority of tax filers used personal exemptions.

• How do personal exemptions work under the new law? The new law completely eliminates personal exemptions. From now on, if you do not itemize your deductions, your only major upfront reduction in taxable income will come from the standard deduction. The new law did significantly increase the standard deduction, but the overall effect on your taxable income will depend on the number of people in your household and your filing status. For a lot of families, the new bigger standard deduction won’t be enough to make up for the loss of personal exemptions. Take a look:A married couple with a child used to be able to subtract the standard deduction –  $12,700 – and three personal exemptions – $4,050 + $4,050 + $4,050, or $12,150 – for a total reduction in taxable income of $24,850. But now, under the new law, that same family is only able to deduct the amount of the bigger standard deduction, which the new law raised to $24,000. So, this family has $850 more in taxable income under the new law.This effect, of course, gets bigger with the more dependents a family has. A family of four was able to subtract $12,700 + $4,050 + $4,050 + $4,050 + $4,050 from their taxable income, for a total of $28,900. A family of five was able to subtract a total of $32,950, and so on. But now, with the elimination of personal exemptions, the family of four would have $4,900 more in taxable income, and the family of five would have $8,950 more in taxable income.

• So, are my taxes going to go up because of this? They could. The new law does include some other provisions that could offset the loss of personal exemptions. The biggest offsetting change is a larger Child Tax Credit, which will make up the difference for many families. However, eligibility for the Child Tax Credit is not the same as eligibility for the old personal exemptions, so there are some families who will lose the personal exemption and are also entirely ineligible for the Child Tax Credit.

Why was the personal exemption eliminated?

This new tax law was passed under a special budget process known as “reconciliation” which allowed the Senate to pass the bill with only 51 votes, rather than the usual 60 votes. However, that same process required Congress to set forth, ahead of time, the total cost of the tax bill over the next ten years, and Congress gave itself $1.5 trillion of room. Included in this law are major corporate tax cuts – including a corporate rate cut of 40 percent, which costs $1.3 trillion all on its own. Along with other major tax cuts aimed at higher-income individuals (e.g. the repeal of the Alternative Minimum Tax, the cut in the estate tax, the lower top income tax rate), the total cost of the proposed tax cuts far exceeded $1.5 trillion. That meant that Congress needed to find other ways to raise taxes to bring the net cost of the tax law down to under the $1.5 trillion threshold. Eliminating personal exemptions is an enormous tax increase, and therefore generates a significant amount of revenue. The Joint Committee on Taxation, the official tax calculators of Congress, analyzed the law and found that the elimination of personal exemptions will raise $1.2 trillion.