how an exemption works
prior to the tax cuts and jobs act there used to be a personal exemption it could be claimed in addition to the standard deduction by people who did not itemize their tax deductions instead there is now one higher standard deduction passed with the tcja while exemptions used to make a bigger difference in calculating your annual taxes prior to the tcja they still can drastically change your tax situation by reducing taxable income 1the personal exemption was repealed with the 2017 reforms but as mentioned was essentially replaced with higher standard deductions for both couples and individuals for tax year 2022 the standard deduction is 12 950 if you file as single 19 400 for heads of household and 25 900 for those married filing jointly for tax year 2023 the standard deduction increases to 13 850 if you file as single 20 800 for heads of household and 27 700 for married filing jointly taxpayers 3 these changes were among many in the tax cuts and jobs act 1through the 2017 filing year individual tax filers were able to claim 4 050 for each taxpayer spouse and dependent child previously for example a taxpayer who had three allowable exemptions could have deducted 12 150 from their total taxable income however if that person earned over a certain threshold the amount of the exemption would have been phased out and eventually eliminated 4tax filers were only able to claim a personal exemption if that person was not claimed as a dependent on someone else s income tax return this rule intentionally set exemptions apart from deductions for example take a college student with a job whose parents claimed them as a dependent on their income tax return because someone else claimed the student as a dependent the student could not claim the personal exemption but could still claim the standard deduction 5in most cases tax filers could also claim a personal deduction for a spouse as long as the spouse was not claimed as a dependent on another person s tax return 5in many cases dependents most commonly include the minor children of the taxpayer however taxpayers may claim exemptions for other dependents as well the irs has a litmus test for determining who is considered a dependent but in most cases it is defined as a relative of the taxpayer parent child brother sister aunt or uncle who is dependent on the taxpayer for support 6the child tax credit doubled to a maximum of 2 000 per child under the tax cuts and jobs act from 1 000 per dependent previously certain income thresholds exist affecting how much credit a family can actually receive 1other types of exemptionsin addition to the above exemptions can come in many forms some not for profit organizations american citizens who work abroad low income taxpayers and other special categories have tax exemptions other exemptions include the following employers withhold income tax from their employees and remit it to the irs however a person who has no tax liability can request an exemption from withholding this simply means that the employer will withhold medicare and social security taxes from the person s paycheck but will not withhold income tax 7certain kinds of income are exempt from taxes exempt income includes municipal bond income and gifts under 16 000 in 2022 and 17 000 in 2023 23 any distributions from health savings accounts hsas used for qualified medical expenses will also be not taxed 8the w 4 form allows employees to let employers know how much tax to withhold from their paycheck based on the employee s marital status number of exemptions and dependents etc every time an employee starts a new job they are required to fill out the w 4 which helps the employer estimate how much money to remit to tax authorities 9