Federal Tex Exemption

A tax deduction for a personal exemption is allowed as a deduction against the taxpayer's income.

When Congress enacted Section 151 of the Internal Revenue Code, it did so believing that a certain amount of income, -- otherwise known as personal exemptions - should not be subject to the federal income tax. Congress rationalized that the amount of income protected from taxation under Section 151 should roughly correspond to the amount of money it would take for survival; for example, money for food, clothing and shelter.

The amount listed in ?151, although adjusted for inflation, may appear insufficient for an individual to survive on. However, it is important to remember that a taxpayer can claim other deductions additionally to personal expemptions. This will further increase the amount of gross income that is eligible for federal tax exemption.

Taxpayers can claim a personal exemption for themselves and their qualifying dependents. Personal exemptions can also be claimed for a husband or wife if the couple files separately, the husband or wife has no gross income, and the husband or wife is not considered a dependent of another person. IRS Regulations allow two personal exemptions in addition to a husband or wife exemption for couples filing jointly.

In calculating their taxable income, individuals can claim all personal exemptions they are eligible for and subtract that amount from their gross income. The size of the personal exemption a taxpayer can take each year is adjusted for inflation.

The tax deduction for personal tax exemptions is considered to be progressive, meaning that it starts to be phased out if the Adjusted Gross Income (AGI) exceeds $362,450 (for 2008) joint tax returns and $282,450 for individual tax returns. The tax exemption is reduced by 2% for each $2,333 that your AGI exceeds the threshold until all tax exemptions are reduced by one-third on your tax return. This is the case for 2008 and 2009 tax returns; for future returns, check with the IRS at irs.gov.

In 2009, the personal exemption amount is $3,650. The exemption amount for taxpayers with adjusted gross income in excess of the maximum phaseout amount is $2,433 for 2009.

Historically, the amount of the exemption has changed according on political policy and the need for tax revenue. Since the Depression, the exemption has increased steadily, however not at a rate high enough to keep up with inflation. Despite the reasoning for the exemption, the actual amounts are less than half of the poverty line.