A personal exemption is an amount set by the IRS each year that an individual can deduct from his or her reported taxable income when calculating income tax liability. Each taxpayer is allowed one personal exemption. An additional exemption is allowed for each qualified dependent that the taxpayer can claim. A dependent is considered by the IRS to be a parent, child, sibling or other relative who lives with the taxpayer and who receives at least half of his or her financial support from the taxpayer. If a taxpayer claims the personal exemption of a dependent, then the dependent cannot claim the exemption on his or her own tax return.
The personal exemption is gradually phased out for those taxpayers reporting higher adjusted gross income thresholds. The threshold for phasing out the exemption differs, depending on whether the tax return is a joint, individual, or head of household return.
The personal exemption is in addition to any standard or itemized deductions made by the taxpayer. The standard deduction is a fixed amount set by the IRS. Alternatively, if a taxpayer has a sufficient amount of qualifying expenses, he or she can choose to itemize these deductions instead of taking the standard deduction.
The amount of the personal exemption is adjusted periodically in accordance with changes in the inflation rate.