Say Goodbye to Personal Exemptions: Understanding the Changes in US Tax Law
Introduction:
Personal exemptions are deductions that taxpayers can claim on their tax returns, thereby reducing their taxable income. They are a way to reduce the amount of taxes owed and keep more money in your pocket. However, personal exemptions have undergone significant changes in recent years due to new tax laws enacted by Congress.
In this article, we will explore what personal exemptions are, how they work, and the changes made to them under the new tax law.
What Are Personal Exemptions?
A personal exemption is an amount of money that you can deduct from your taxable income for each person included on your tax return. In other words, it’s a reduction in the amount of money you owe Uncle Sam at tax time.
For example, if you’re married and filing jointly with two children who are dependents on your return, you would be able to claim four personal exemptions – one for yourself as well as one for each dependent.
How Do Personal Exemptions Work?
The value of a personal exemption depends on several factors such as age and filing status. For 2021 (for taxes filed in 2022), each exemption is worth $4,300.
To claim a personal exemption on your taxes, you’ll need to provide certain information about yourself or anyone else listed on your return who qualifies as a dependent (more below). The IRS uses this information to determine whether or not you’re eligible for an exemption and what size it should be.
Changes Made Under New Tax Law
The Tax Cuts and Jobs Act (TCJA) overhauled many aspects of U.S. taxation when it was passed in late 2017. Among these changes were modifications made to how taxpayers take advantage of personal exemptions when preparing their federal income taxes.
One major change was that starting with the 2018 tax year (taxes filed in early 2019), TCJA eliminated all individual taxpayer deductions except those related directly to charitable contributions or medical expenses. This means that taxpayers can no longer claim personal exemptions on their returns.
However, the standard deduction for each filing status was increased to compensate for the loss of personal exemptions. For example, in 2021, the standard deduction for a married couple filing jointly is $25,100.
Additionally, TCJA eliminated some other deductions such as state and local tax (SALT) deductions which were previously unlimited and capped them at $10,000 per year. This change reduced itemized deductions that many households could take advantage of since they had more than $10K in SALT payments.
Who Qualifies As A Dependent?
Dependents are individuals who rely on you financially or receive more than half of their support from you during the tax year. Dependents can be your children or other relatives such as parents or siblings if they meet certain criteria laid out by the IRS.
To qualify as a dependent:
– They must be related to you either by blood or marriage.
– They must live with you for at least six months out of the year.
– They must not have earned more than $4,300 in gross income during 2021.
– You must provide more than half of their financial support throughout the year.
If someone meets these requirements and cannot file a tax return themselves due to age or disability then it’s possible that you may claim them as a dependent on your own return.
Conclusion
Personal exemptions were an important aspect of U.S. taxation until recent changes made under new tax laws rendered them obsolete. While taxpayers can no longer claim individual exemptions when preparing federal income taxes, there are still ways to reduce taxable income through itemized deductions like charitable contributions and mortgage interest paid.
Understanding what qualifies someone as a dependent is also crucial since dependents often warrant certain credits like child care credits or education credits which can lower taxes owed even without personal exemption claims.
In summary: while personal exemptions may no longer exist, there are still ways to save on taxes and keep more of your money in your pocket.