728 / What personal exemptions is an individual entitled to deduct in calculating taxable income?

Editor’s Note: The 2017 tax reform legislation suspended the personal exemption for tax years beginning after December 31, 2017 and before December 31, 2025. Qualified disability trusts will continue to be permitted a personal exemption amount equal to $4,150 for 2018, $4,200 for 2019, $4,300 for 2020-2021, $4,400 for 2022, $4,700 for 2023, $5,000 for 2024 and $5,100 for 2025 (projected).¹

For tax years beginning before 2018 (and after 2025), taxpayers generally were permitted to deduct the following personal exemption amounts: (1) For taxable years beginning in 2017, $4,050 for each of two spouses on a joint return ($8,100 combined); (2) $4,050 for a taxpayer filing a single or separate return; (3) $4,050 for the spouse of a taxpayer filing a separate return, provided the spouse has no gross income and is not claimed as the dependent of another taxpayer.² The personal exemption amount is adjusted annually for inflation.³ Generally, the exemption will not be allowed unless the Social Security number of the individual for whom the personal exemption is being claimed is provided.⁴

Planning Point: When the personal exemption was in effect, it was used to help employers determine correct tax withholding for employees. In the wake of tax reform, IRS released a new Form W-4 designed to reflect the new changes to the tax code, including the elimination of the personal exemption. The new form is more complex and detailed than previously existing forms, because employers can no longer use the personal exemption to calculate withholding. The form requests information regarding the employee’s credits and deductions, as well as any spouse’s income and income from other employment. However, much of this information is optional, although providing detailed income information will allow the employer to more accurately calculate the employee’s withholding.

Planning Point: For purposes of the definition of “dependent” for other provisions in the IRC, the IRS has released guidance stating that the exemption amount (which was otherwise reduced to zero for 2018-2025) will be treated as though it remained at the pre-reform $4,150 amount in 2018. In other words, for purposes of determining whether a deduction is allowed for the personal exemption, the relevant amount is $0. For provisions that reference the personal exemption for all other purposes, the relevant amount is $4,150 in 2018, $4,200 in 2019, $4,300 in 2020-2021, $4,400 in 2022, $4,700 in 2023, $5,000 for 2024 and $5,100 in 2025 (projected).⁵

There was no phaseout of the personal exemptions based on adjusted gross income (AGI) in 2010-2012. The phaseout, including reductions of the phaseout in 2006 through 2009 and repeal of the phaseout for 2010, as well as its reinstatement for tax years beginning after 2012 and before 2018, is discussed below. Under the American Taxpayer Relief Act of 2012 (“ATRA”), the phaseout resumed for tax years beginning in 2013, but was once again suspended by the 2017 Tax Act.

When in effect, the personal exemptions of certain upper income taxpayers are phased out over defined income levels. The dollar amount of personal and dependency exemptions of taxpayers with adjusted gross income above certain levels is reduced by an “applicable percentage” in the amount of two percentage points for every $2,500 (or fraction thereof; $1,250 in the case of a married individual filing separately) by which the taxpayer’s adjusted gross income exceeds the following threshold amounts in 2017: Married filing jointly (and surviving spouses); $313,800; Head of household: $287,650; Single: $261,500; Married filing separately: $156,900.