The Personal Exemption
Every taxpayer is entitled to deduct $3,300 from their income before their income tax is calculated. Furthermore, every taxpayer can deduct an additional $3,300 from their taxable income for each of his or her children, meaning that the larger the family the larger the deduction. It is important to recognize, however, that when it comes to extremely low-income taxpayers, while the personal deduction will reduce the amount they owe in federal income taxes (and in some cases it will eliminate it all together), it will never provide additional assistance.
Take the case of a hypothetical family, the Joneses. Mr. and Mrs. Jones have two young children, and, as a couple, they make $25,000 a year. Without the personal exemption, the Joneses would have to pay income taxes on the entire $25,000 but because both Mr. and Mrs. Jones can claim a $3,300 personal deduction each, their taxable income comes down to $18,400. Moreover, the Joneses can also deduct $3,300 for each of their two children, bringing their final taxable income to 11,800. So, because of the personal exemptions, the federal government treats the Joneses as if they made only $11,800 a year, not $25,000 a year. In the Jones’ case, the personal exemption provision saves them more than $1,800 in federal income taxes.
In order to highlight the relationship between the Personal Exemption and children, compare the Joneses to their neighbors, the Smiths. Mr. and Mrs. Smith also make $25,000 a year but they have no children. Of course, the Smiths can also claim a personal deduction for each of themselves bringing their taxable income down to $18,400, but that’s it. They will be expected to pay about $2000 in federal income taxes. The Jones, however, will be expected to pay only $1180 in federal income taxes, more than $800 less than the Smiths even though they have the same income. The tax system differentiates between the Jones family and the Smith family because the Jones family has two children.
