Personal Exemption Changes: What the changes mean for you
With the tax season right around the corner, changes to your tax situation will soon be in effect. With the Tax Cuts and Jobs Act starting for 2018 returns, one of the major changes that will affect some returns is the changes to the Personal Exemptions.
In previous years, tax payers could receive a $4,050 (for 2017) credit for each qualified child or relative that passed subsequent tests in order to qualify. For tax years between 2018 to 2025, these exemptions have been reduced to $0 (Note: In 2026, these exemptions are slated to come back into effect).
If I have qualified children or qualified relatives, should I still claim them since I no longer get the exemptions?
The answer to this varies for each independent tax situation, however, there are multiple benefits to claiming either a qualifying child or qualifying relative. Below is a breakdown for each benefit for qualifying child and qualifying relative.
Per the IRS.gov website, the eligibility rules are similar to previous years in that the child must pass the relationship, age, residency, and joint return test(s) in order to qualify.
- Relationship: Must be son, daughter, adopted child, stepchild, foster child, or a descendent of any of them such as your grandchild
- Age: At the end of the filing year, the child must be younger than you and younger than 19 years of age. (younger than 24 if a full-time student)
- Residency: Child must live with you (or spouse if you file a joint return) in the U.S for more than half the year.
- Joint Return: Child cannot file a joint return for the tax year unless the child and child’s spouse did not have a separate filing requirement and filed the joint return only to claim a refund.
For each qualifying child, you can receive the full benefit if your AGI is lower than $200,000 ($400,000 for MFJ). Phaseout process begins for any money over these amounts.
Each qualifying child is eligible for a $2,000 deduction with a $1,400 refundable limit.
Eligibility rules are similar compared to previous years. Qualifying relatives must pass the U.S. citizen, Relationship/Residency, Income, and Support test(s).
U.S. Citizen Test: Dependent must have a Social Security number in order to claim them as a qualifying relative.
- Relationship/Residency: Must be a close relative such as siblings, half-siblings, and step siblings, parents, stepparents, grandparents, nieces, nephews, aunts, uncles, in-laws and, any children that are not covered under the qualified child can also be claimed as a qualifying relative. In addition, relatives are not the only qualifying relatives that can be claimed. As long as the dependent passes the other tests and lives with you the entire year, then they too can be claimed as a qualifying relative.
- Income: Qualifying relative must have income less than $4,050 (Even though the personal exemption has been removed, the amount is still in effect when establishing whether someone passes the income test. See IRS Code 151).
- Support: You must have provided the dependent more than 50% of their support.
For each qualifying relative, you can receive a $500 non-refundable credit
Phaseout begins at the same AGI as qualifying child (See above).
In addition, if you are able to claim either a qualifying child or qualifying relative, you are now eligible for the Head of Household filing status. This is important because the HoH bracket is the second-best bracket to be in, in terms of percentages only to Married Filing Jointly.
Though there are always special circumstances, this breakdown is meant to be used as a guideline to topical tax situations with the new changes for personal exemptions. If you have any additional questions about situations that were not covered, WGA will be more than happy to assistant you!
For more info, please see the following links:
- For qualifying child rules: https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/qualifying-child-rules
- For qualifying relative rules: https://www.irs.gov/pub/irs-drop/n-18-70.pdf
- For overall changes to the Tax Act: https://www.irs.gov/pub/irs-pdf/p5307.pdf
- For specifics on Child Tax Credit: https://www.irs.gov/pub/irs-pdf/p972.pdf