What are personal exemptions?
A personal exemption is a tax deduction that allows you to reduce your taxable income, thus reducing the amount of income tax you owe.
The amount of the tax deduction is directly related to your filing status. You can claim a personal exemption for yourself and any dependents you support. If you are filing jointly with a spouse, you can claim two personal exemptions, one for each spouse, even if only one spouse earns all of the income. You cannot claim your own personal exemption if someone else claims you as their dependent.
The combined amount of all personal and dependents exemptions is deducted directly from your Adjusted Gross Income (AGI).
The amount of the personal exemption is indexed for inflation and increases almost every year. For 2012 the personal exemption is $3,800.
In previous years, the personal exemption began phase out above a specified level of income. In 2009, for example, the phase out of the exemption started at $166,800 for single filers with full phase out slotted at $289,300 of AGI.
For 2010, 2011, and 2012, however, the phaseout limits do not apply. The income thresholds are set to return in 2013, barring passage of further legislation.