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.