One of the biggest changes in the 2017 tax bill is eliminating the personal exemption. But what exactly was it? And how might this affect you as you file your taxes this year?
The personal exemption originated, along with the modern income tax itself, in the 16th amendment to the US Constitution. It originally exempted the first $3000 of each earner’s income, somewhat above the average income at the time (and equivalent to about $65000 modern dollars). This was in keeping with the intent of the tax: to be a progressive tax, on the “excess” income of high earners.
As political philosophies changed, and the government needed more revenue in the Great Depression and World War II, this amount decreased to just $1050, a subsistence living, then failed to rise again with inflation, gradually broadening the impact of the income tax.
In its greatly reduced form, the personal exemption in effect became more of the standard deduction: another slice of income that is not taxed (except if you make enough to pay the Alternative Minimum Tax). Where there was previously a standard deduction of $6350 and a personal exemption of $4050, there is now only the standard deduction, at $12,000, meaning that the first $12,000 of a single taxpayer’s income (or $24,000 of a married couple’s income), can be deducted from taxable income.
So who does this impact, and why? First off, for taxpayers who itemize deductions, and have large amounts of business or other expenses, this will hurt, since combining the exemption into the standardized deduction prevents “double dipping” if the itemized deductions were over $12,000. However, most taxpayers will benefit, as only a quarter or so of 1040 forms filed even before these changes made use of itemized deductions, and with the increased standard deduction, there will be less reason to itemize than before.
Either way, the impact is likely to be minimal, but if you want to maximize your refund, and avoid the audit, working with a financial professional on your tax return is the safest, most effective way to go!