When it comes time to file your taxes, the chances are good that you are quite familiar with IRS Form 1040. The vast majority of the American public uses IRS Form 1040 to not only report the income that they earned throughout the year but also to claim specific exemptions, credits and deductions which can help reduce their tax burden and put money back in their pockets through a tax refund. Understanding how exemptions on 1040 forms work may feel somewhat complex at times, but the concepts can actually be distilled into a series of concise and comprehensive ideas. With this in mind, you should be able to begin claiming qualifying exemptions on your 1040 form right away. You should know, however, that new tax laws have eliminated personal exemptions for the upcoming filing seasons.
Beginning in 2018, American taxpayers should no longer concern themselves with tax exemptions, as these attractive tax discounts have since been replaced with a more generous standardized deduction policy.
Defining an Exemption
In simple terms, an exemption can be defined as a fixed sum of money that the federal government allows individuals to subtract from their overall income in order to help reduce their overall tax bill. Prior to 2018, the federally mandated personal exemption existed for individual filers and married couples filing jointly or separately, as well as senior citizens and individuals with disabilities. Depending upon an individual's specific situation, they could qualify for these exemptions.
Historic Trends for Tax Exemptions
Historically, individuals have been able to claim tax exemptions both for themselves and any dependents they may care of. Dependents commonly take the form of children, but they can also include adults who, for whatever reason, are unable to care for themselves. The most popular scenario in which an adult dependent is claimed is when an individual is caring for their aging parents in their own home and is seeking to offset the expenses of doing so through tax exemptions.
In the 2017 tax year, claiming a single dependent provided a tax exemption of $4,050, while claiming two dependents brought a tax exemption of $8,100. This amount could grow incrementally based on the number of dependents presents.
Elimination of Personal Exemptions in 2018
Following the introduction of the Tax Cuts and Jobs Act, tax exemptions have been officially eliminated through, at a minimum, the year 2025. This means that the exemptions described previously, such as those provided for individuals with dependents, are no longer accessible. This does not mean that working adults and adults caring for dependents will not have access to advantageous tax breaks, however. While the tax exemption opportunities have been dissolved, the personal deduction mandated by the IRS has nearly doubled. With that in mind, individuals will still have the opportunity to reduce their tax burden during filing season. In many situations, individuals will find that the new tax policies in place will actually reduce their annual tax payments and improve their chances of receiving a tax refund.
With an increase in size of the standard deduction, individuals seeking to itemize deductions on their next tax return must first ensure that their itemized list exceeds the value of the standard deduction. If it does not, then itemization is not the best route to take.
Although it remains to be seen how these new streamlined policies will affect American households during tax season, the chances are good that these policies are here to stay for the next several years. Those who may still have questions about tax exemptions and deduction opportunities should consult with a qualified tax professional in order to ensure that they are properly completing their tax return.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.