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Find Out How the Average American Taxpayer Got This $8,094 Tax Break

By Dan Caplinger – Feb 1, 2016 at 7:02AM

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Some tax-saving opportunities are available to everyone -- except the very rich.

Image source: IRS.

When you look through tax laws that save taxpayers money, you'll find that many of them are aimed at people with high-enough incomes to take advantage of them. With one tax provision, however, ordinary Americans can get write-offs worth thousands of dollars, while the rich aren't eligible to deduct anything at all from their taxable incomes. Let's look more closely at one of the simplest tax breaks available on your tax return to find out who benefits the most -- and who gets left out in the cold.

Personal exemptions and you
The personal exemption is just about the easiest provision to understand in the tax laws. Each year, you're allowed to claim a personal exemption for yourself as well as any dependents that you have. The value of that personal exemption varies from year to year, indexed for inflation. For 2015, each personal exemption you have lets you subtract $4,000 from your taxable income.

To take full advantage of personal exemptions, you have to know how the tax laws define a dependent. Most dependents are children of the taxpayer in question, under age 19 at the end of the year or a student under age 24 or disabled. The child must live with you for more than half the year, with exceptions for attending college, and the child must not provide more than half of his or her financial support during the year.

However, dependents need not be children of the taxpayer. Parents, grandparents, or others who live with you all year, who have minimal income of less than $4,000, and for whom you provide more than half the financial support for the year can also qualify as dependents.

In order to claim a personal exemption for yourself, you must not be the dependent of another taxpayer. For instance, many children who file their own tax returns don't get to take a personal exemption because their parents take it instead.

All in all, almost 137 million taxpayers claim personal exemptions on their tax returns, and the total amount they wrote off their taxes during the most recent year for which data is available was a whopping $1.11 trillion. That works out to $8,094 per taxpayer, showing that the typical tax return claims more than two personal exemptions on average.

Why the rich don't get personal exemptions
Personal exemptions aren't available to everyone. In particular, the amount that you're allowed to claim for personal exemptions gets phased out for those with incomes above a certain threshold.

Specifically, for 2015, you can see the threshold amounts for various filing statuses below.

Filing Status

Personal Exemption Phaseout Begins at This Income Level...

... and Ends at This Income Level

Single

$258,250

$380,750

Married Filing Jointly

$309,900

$432,400

Head of Household

$284,050

$406,550

Married Filing Separately

$154,950

$216,200

Data source: IRS.

How the phaseout works is a little complicated. For those other than married filing separately, you lose 2% of your total personal exemption for every $2,500 your income is above the threshold. Portions of $2,500 force you to round up, which means you'll lose more. For example, a single person whose income is $258,350 loses 2% of their personal exemptions even though they're only $100 above the threshold.

Notice that the phaseout takes away the same percentage of your exemptions no matter how many of them you claim. This costs those with large families more than those with smaller ones, because the total exemptions that a large family claims will typically be higher.

Don't miss out
Given how high those income levels are, though, it's not surprising to find that the vast majority of those filing returns are able to claim their portion of what on average is a more than $8,000 tax break for American taxpayers. The ability to reduce your taxable income that much is definitely worth making sure you get right.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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