Personal Exemptions

Personal Exemptions


Thanks to the complexity of the United States tax codes, the system itself, and the variations of tax codes from state to state, completing your personal tax return and maximizing your deductions and exemptions to their fullest potential, is like trying to complete a mind-twisting maze. The average individual required to file a personal tax return has no grasp of the US tax system, and must therefore rely on one of the many tax professionals to complete their return. Quite often, deductions and exemptions are overlooked simply because of a lack of communication.
What are our allowable personal exemptions and how is the exemption rate calculated? The following article will discuss and define these terms, and what they mean to the average tax payer.
Personal exemptions for your tax reporting purposes refer to you, your spouse, and any dependents you may have in your household. The United States tax system makes an allowance for your family by allowing a deduction for each member, prior to assessing your tax liability. Although these rates have remained fairly steady over the past eighty something years, the level of income, and the tax levied on that income has shown an enormous growth rate.
The personal exemption for single persons in 1913 was $3000 and the exemption for married individuals in that same year was $4000. Not much has changed since 1913, in the way of personal exemptions.
The most interesting aspect in the area of personal exemptions, now that we've defined what they are and why we're allowed to take them, is that they have changed very little since the inception of income tax in 1913. When U.S. income tax was brought into existence, the average amount of income that was taxable after exemptions was 1%; for many Americans, their income wasn't even enough for them to file a tax return. Compare that rate with the current liability rate, and at least 10% of our income is taxable. That's a tremendous increase in revenue for the government, and a huge tax liability for the individual taxpayer.
On the individual tax form, also known as the 1040, your personal exemption information will directly follow your filing status. At this point, you must list all persons for which an exemption can be claimed that reside as a part of your household. Upon completion of the income section of the 1040, and the adjustments to income directly following, you will then be asked to compute an exemption rate, the number of persons claimed in the exemption section of the return, by a certain dollar value. This rate has remained fairly steady at somewhere around $3000 for each person claimed as an exemption. What effect does this have on your tax liability?
Well, quite often, the adjusted gross income level less the exemptions and standard deduction will leave only about 10% of your income as taxable income. And, most every individual taxpayer with a job and a W-2 will have already had at least 10% of the income deducted and paid as Federal withholding tax each week. What does this mean at the end of the year? The taxpayer will generally be due a refund.
Although the personal exemption rates haven't changed much since their inception, the addition of dependents and the standard deduction have helped to offset the amount of income that we tax. To further accommodate the reduction in tax liability, the exclusion of IRAs, MSAs, and SEPs from our taxable income has worked to create an even lower taxable rate.
Personal exemptions were an original part of the U.S. Tax code, and have been a constant throughout the history of the tax system. There have been many changes to the taxable income we report, the areas of income that are taxable, and the income exclusions that aren't taxable; but the exemptions have remained. Perhaps as insulation for the average individual taxpayer, who would have no capital gains tax breaks, very few pre-tax savings deductions, and no tax credits for employment taxes. An overwhelming majority of Americans receive a paycheck each week, and a W-2 at the end of the year. Their personal exemptions and standard deductions are their only breaks in the tax liability assessments.