8516 / What is the personal exemption?
For tax years beginning before 2018 (and after 2025), the personal exemption is essentially a fixed tax deduction adjusted for inflation each year. For tax year 2018-2025, the personal exemption is suspended under the 2017 tax reform legislation. With an exception discussed below, regardless of filing status, each individual taxpayer who files a return was entitled to claim a personal exemption prior to this suspension.
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 draft Form W-4 designed to reflect the new changes to the tax code, including the elimination of the personal exemption. Late in 2019, the IRS released a simplified, final version of the new Form W-4. The new Form W-4 uses a multi-step process to calculate withholding. Form W-4 now asks for information regarding: (1) the employee’s personal (identifying) information, (2) whether the employee has multiple jobs or a spouse who works, (3) information about any dependents, (4) optional other adjustments (such as extra withholding or to account for itemizing deductions). Beginning in 2020, new employees are required to complete the final Form W-4. Existing employees with an old Form W-4 on file are not required to complete the new form, but employers are permitted to ask them to complete the new Form W-4.2
Married couples filing joint returns were entitled to claim two personal exemptions (one for each spouse). In addition to a personal exemption, an additional exemption in the same amount (sometimes referred to as a “dependency exemption”) was available for each individual a taxpayer may claim as a dependent.
There are several special rules that apply to claiming exemptions. A married spouse filing a separate return could claim an exemption for the spouse provided the other spouse had no gross income and was not claimed as a dependent by another taxpayer.3 A child or other dependent (such as a parent) who filed his or her own return could not claim a personal exemption.4 Generally, the exemption was not allowed unless the Social Security number of the individual for whom the personal or dependency exemption was being claimed was provided.5