Personal Exemptions vs. TCJA

The biggest revenue source of the federal government are individual income taxes. In 2017, it brought in nearly $1.66 trillion, which makes up 48% of the total federal revenues. Meanwhile corporate income tax raised $324 billion, or approximately 9% of the federal government’s revenue.

The individual income tax follows a progressive system – those earning higher incomes are required to pay higher rates. In 2015, taxpayers with incomes of $200,000 or higher (this number accounted for 4.5% of all tax returns) paid 58.8% of federal income taxes. On the other hand, those with incomes below $30,000 which accounted for 44% of all returns paid only 1.4% of all federal income tax.

Effective tax rates, which is computed as the total owed income tax divided by adjusted gross income – also increases the higher the income. In 2015, taxpayers making less than $30,000 had an effective tax rate of 4.9%, those making between $50,000 – less than $100,000 paid 9.2% and those with incomes of at least $2 million paid 27.5%. 

Effective tax rates fell across the board but those in the highest-income tiers had the steepest drops. But following the enactment of American Taxpayer Relief Act of 2012 the effective rates rose sharply for those groups.

President Trump and congressional Republicans prioritized the lowering of corporate income taxes. However in spite of the 35% statutory rate on corporate profits most corporations pay significantly less, due to numerous credits, deductions, and other special tax provisions.

Individual taxpayers get 80% of tax breaks – mortgage-interest deduction, individual charitable contribution deductions, child tax credit, and others.

Personal Exemptions

Personal exemptions help ensure that the poorest households will not have to pay income tax. The Tax Cuts and Jobs Act eliminated personal exemptions, but it was replaced with the increased standard deduction and child credit.

Prior to 2018, taxpayers were able to claim personal exemption not just for themselves but also for their dependents for up to $4,150 in 2018. Personal exemptions were part of the modern income tax since it started in 1913. In addition to making sure that very low-income households do not pay income tax, personal exemptions also link tax liability to the size of the household. 

As with other exemptions and deductions, however, personal exemptions tax benefits depend on the marginal tax rate of the individual. A single taxpayer who belongs to the 12% bracket would save $498 of taxes if they have a personal exemption of $4,150, while a single taxpayer who belongs to the 32% tax bracket would save $1,328. So under US progressive income tax system, exemptions are more valuable to high-income taxpayers than those in the low income bracket.

Tax credits on the other hand can have the same value for all taxpayers across the board. Through the Tax Cuts and Jobs Act of 2017, we no longer have to worry about this disparity. Personal exemptions for dependents have now been replaced with expanded child tax credits  to equalize tax benefits for children and other dependents.

Category: Tax Tips

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