Tax Tip Tuesday 2: Personal Exemptions

Tax Tip Tuesday 2: Personal Exemptions

May 29, 2018

In the first issue of Tax Tip Tuesday we mentioned the effect of the personal exemption in determining your taxable income.  In prior years the personal exemption, last year $4,050 per eligible dependent, was phased out or reduced as your adjusted gross income (AGI) exceeded the threshold for your filing status (see table below).  The deduction for the personal exemption is reduced ratably starting at the lower end of the phase-out scale and totally eliminate once AGI reached the top end of the phase-out range.

Filing Status Annual Income (AGI) Limit Range for Personal Exemption Phase-out
Year – 2016 2017 2018
Single Filer $259,400 to $381,900 $261,500 to $384,000 $266,700 to $389,200
Married Filing/Joint Return $311,300 to $433,800 $313,800 to $436,300 $320,000 to $442,500
Heads of Households $285,350 to $407,850 $287,650 to $410,150 $293,350 to $415,850
Married Individuals Filing Separate Returns $155,650 to $216,900 $156,900 to $218,150 $160,000 to $221,250

For tax returns beginning in 2018, the personal exemption is eliminated for all taxpayers as a part of the new tax laws.  This will have its largest impact on families with more than for (4) qualified dependents. Under old tax rules, a family of five (5) would claim a personal exemption of $4,050 for each dependent or $20,250 plus claim a standard deduction of $12,700 reducing their AGI income by 32,950. Under the new law, there is no personal exemption, only the increased standard deduction of $24,000 to reduce gross income.  This results in an increase in taxable income of $8,950. The elimination of the personal exemption will have no effect on high-income earners because of the phase-out rules also applied in earlier tax periods.

Families with children are also eligible for the child care credit.  A tax credit differs from a tax deduction. A tax deduction reduces taxable income, the amount on which taxes are calculated.  Whereas a tax credit reduces the tax that has been calculated. The child care credit has been increased from $1,000 to $2,000 per qualified child and a new $500 family credit has been instituted for eligible dependents over 17 years of age or for an adult you claim as a dependent.  Similar to the personal exemption phase-out, the child care credit also has a phase-out range. In 2017 the phase-out range for married couples began with an AGI of $110,000 and $75,000 for a single filer. The scale below shows the new higher phase-out ranges which will make the credit available to more households.

Tax Filing Status Maximum AGI for Full Credit AGI Where Credit Disappears
Single $200,000 Over $240,000
Married filing jointly $400,000 Over $440,000
Head of household $200,000 Over $240,000
Married filing separately $200,000 Over $240,000

In previous years the child care credit was nonrefundable (however, there was formerly an additional child tax credit that effectively made the old child tax credit refundable).  Under the new tax code, the credit is refundable up to $1,400 for each qualifying child.

The refundable portion of the credit is limited to 15% of your earned income (basically wages) in excess of $4,500.  This limits the amount of the credit available for refund to lower income filers. A family of five with earned income of $100,000, would be eligible for a $4,200 credit ($1,400 per child).  The refundable portion of the credit for a single parent family of two (2), with an income $13,333 or less would be reduced to less than the $1.400 per child


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