One of the biggest changes to the individual tax code that was codified in the new tax law was the elimination of a tax benefit called the personal exemption. The exemption was available to all people within a household and served to lower the taxable income for a family (or individual). In 2017, the personal exemption per person was $4,050. That means that an individual used to be able to subtract $4,050 from their taxable income and a family of five used to be able to subtract $20,250 (5 times $4,050). This exemption was available both to taxpayers who itemized their deductions and those who took the standard deduction. The new tax law eliminated these exemptions entirely.
Will I pay more in taxes due to the elimination of the personal exemption?
It depends who you are, and what your tax situation is, but if you have children, your taxable income will almost certainly go up, and you could see an increase in your taxes due to the elimination of the personal exemption.
The personal exemption benefit did get phased out for a small share of people at higher-income levels, but the vast majority of tax filers used personal exemptions.
Why was the personal exemption eliminated?
This new tax law was passed under a special budget process known as “reconciliation” which allowed the Senate to pass the bill with only 51 votes, rather than the usual 60 votes. However, that same process required Congress to set forth, ahead of time, the total cost of the tax bill over the next ten years, and Congress gave itself $1.5 trillion of room. Included in this law are major corporate tax cuts – including a corporate rate cut of 40 percent, which costs $1.3 trillion all on its own. Along with other major tax cuts aimed at higher-income individuals (e.g. the repeal of the Alternative Minimum Tax, the cut in the estate tax, the lower top income tax rate), the total cost of the proposed tax cuts far exceeded $1.5 trillion. That meant that Congress needed to find other ways to raise taxes to bring the net cost of the tax law down to under the $1.5 trillion threshold. Eliminating personal exemptions is an enormous tax increase, and therefore generates a significant amount of revenue. The Joint Committee on Taxation, the official tax calculators of Congress, analyzed the law and found that the elimination of personal exemptions will raise $1.2 trillion.