Q: Tax Playa, what the heck is a "personal exemption?"
Mary, Wilmington DE
A: If you file a tax return, you can usually take an exemption for every person in your household. In some cases, the ability to take an exemption is limited based on dependent status, residency, or income...
For more information on this, please see IRS Publication 501, Exemptions, Standard Deduction, Filing Information.
The personal exemption is allowed for every taxpayer filing a return, his spouse, and his dependent (with some important exceptions).
The personal exemption amount for 2008 is $3500. This increases with inflation every year.
When filling out your W-4 at work, the number of exemptions you claim reduces your taxable income for withholding by an amount equal to the personal exemption amount. So, taking 3 exemptions from withholding in 2008 would shield $10500 from withholding tax.
Who Cannot Take an Exemption
Dependents cannot claim their own exemption on their own tax return. Parents cannot claim an exemption for a dependent unless they pass the dependency test, described earlier on this site.
Non-resident aliens cannot claim a personal exemption for spouses or dependents.
If a spouse dies, the surviving spouse can claim an exemption for him the year of death.
Personal Exemption Phaseout
If your household earns too much money, its ability to claim exemptions will be limited.
Specifically, total personal exemptions phase out (but not below $1200 per exemption) between (for 2008):
- Single: $159950-$282450
- Married Filing Jointly and Qualifying Widow(er): $239950-$362400
- Heads of Households: $199950-$322450
- Married Filing Separately: $119975-$181225
The personal exemption phaseout (PEP) is set to go away as part of the 2001 EGTRRA Bush tax cuts. As such, it faces uncertainty.
Under current law, the PEP is two-thirds its normal strength in 2006 and 2007, one-third its normal strength in 2008 and 2009, and is fully-eliminated by 2010. Beginning in 2011, however, the PEP at its old, full strength returns.
This is yet another expiring tax break that must be dealt with by policymakers.