Most people don't find tax preparation fun, and once you finally feel like you have a handle on how to get your returns done, the government goes and changes the rules on you. The current tax season is one that could be highly frustrating for Americans looking to file their taxes, because tax reform measures made a large number of changes. New rules have been added, old ones have been taken out, and many existing rules have seen tweaks that could make them a lot more valuable in some cases -- or less valuable in others.
One of the provisions that didn't survive tax reform was the personal exemption. For years, personal exemptions allowed taxpayers to reduce their taxable income by thousands of dollars, which in turn dramatically lowered the amount of tax they had to pay. Although other provisions included in the tax reform measure were designed to offset the loss of the personal exemption, they didn't have the same impact for every taxpayer. Many will end up ahead overall, but some will wish they could have kept their personal exemptions.
How the personal exemption worked
Few tax laws are easy to grasp, but the personal exemption was on the simple end of the scale. When you filed your tax return, you were able to claim an exemption for yourself, as did your spouse if you filed jointly. You also got to claim additional exemptions for children of other dependents. For every exemption you claimed, you got to reduce your taxable income by $4,050. So couples with two qualifying children were able to get a $16,200 reduction in the amount of income that got taxed.
The value of that deduction depended on what tax bracket you were in. For the lowest-income taxpayers, personal exemptions resulted in only modest savings, as tax rates of 10% were already reasonably low, and you couldn't get any credit for having a negative taxable income. For top-bracket taxpayers, exemptions could cut more than $1,600 off their tax bills under the old law.
What tax reform did instead
Lawmakers decided to get rid of personal exemptions as part of the new tax laws that took effect at the beginning of 2018. However, there were a couple of offsetting provisions that helped to reduce the negative impact of eliminating personal exemptions.
The first was to increase the standard deduction. Single filers saw their standard deduction rise from $6,350 to $12,000, while joint filers got a boost from $12,700 to $24,000. Those increases of $5,650 and $11,300 corresponded to the value of just under one and a half personal exemptions for singles and three exemptions for joint filers. If you had fewer exemptions under old law, then tax reform left you ahead, while those who had more exemptions took a hit.
The other was to expand the size and applicability of the child tax credit. Under old law, the child tax credit provided a $1,000 reduction in tax liability for children 16 or younger. Tax reform doubled the amount of the credit to $2,000. It also dramatically boosted the income limits under which the credit would be available.
Will you end up ahead?
The taxpayers who are most at risk of ending up worse off because of the tax law changes are those who had big families and whose children are too old to be eligible for the child tax credit but young enough to provide personal exemptions. That includes children who are 17 or 18 years old, as well as those who are 19 to 23 and qualify as students.
In addition, if you itemized deductions under old law and expect to keep doing so under new law, then the boost in the standard deduction won't do you any good. You'll just miss out on the personal exemptions that will no longer provide an additional reduction in your taxable income.
As with all tax changes, some taxpayers will end up winners while others lose out. For most who qualify for bigger child tax credits and standard deductions, the loss of the personal exemption won't be a big deal. But for those who can't get those offsetting benefits, not having the personal exemption could be costly.
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