Friday, March 5, 2010


So, what is the deal with the personal exemption? Section 151 of the U.S. tax code allows for the personal exemption. In 1913, the amount of the personal exemption was $3,000, which would be $64,730 in 2009 dollars. Congress initially passed "personal exemptions" believing that a certain amount of income need not be taxed, something roughly equivalent to the poverty line. Clearly, the personal exemption has not kept up with inflation or income changes (see graph below), however changes in the personal income tax code, including deductions and credits, may make up for some of the difference.

Personal exemptions are generally taken for you, a spouse if married, and children if you have them. However, Congress has extended the personal exemption to other individuals; for instance, if you took in an individual displaced by Hurricane Katrina in 2005, you were able to claim that individual as an exemption in 2005 and 2006.

Personal exemptions are more valuable to higher income earners under the progressive tax features in the United States. The 2009 personal exemption is $3,650. A higher income individual, paying the 35% tax rate saves $1,278 from the exemption, whereas a lower income individual paying the 15% rate saves only $548.

Currently, there are limits to the amounts of Adjusted Gross Income (AGI) a filer can earn in order to claim the personal exemption and high income earners are phased-out of the personal exemption according to income levels and filing statuses below.

Filing Status Phaseout Begins Phaseout Ends
Married Filing Jointly 250,200 372,700
Qualifying Widow(er) 250,200 372,700
Head of Household 208,500 331,000
Single 166,800 289,300
Married Filing Separately 125,100 186,350

This phase-out structure is scheduled to expire after 2009, after which, all income levels will again be eligible to claim personal exemptions.

On a completely unrelated note, be sure to claim your Lifetime Learning Credit on this year's taxes! If you haven't claimed it in the past, you can always refile and get some $$ back.

No comments:

Post a Comment