The loss of the personal exemption in the tax cut legislation implicitly creates a new tax on college students. Although the Child Tax Credit was doubled to compensate for the loss of the personal exemption, the tax credit is available only for children under age 17. The new tax credit for other dependents does not fully compensate for the lost personal exemption for college students, since it is worth less than half as much.
Loss of the Personal Exemption
The Tax Cuts and Jobs Act of 2017 eliminated the personal exemption to offset part of the cost of the increase in the standard deduction.
In 2017, the personal exemption provided a $4,050 per person reduction in taxable income for the taxpayer, the taxpayer’s spouse and the taxpayer’s dependents. The personal exemption was available to taxpayers even if they did not itemize deductions.
Increase in the Child Tax Credit
The standard deduction for married taxpayers who file joint returns increased from $12,700 in 2017 to $24,000 in 2018. The difference, $11,300, is greater than two exemptions but less than three exemptions. In effect, married taxpayers who have one or more children are penalized by the change in the standard deduction.
To compensate for this, the tax cut legislation doubled the Child Tax Credit from $1,000 to $2,000 per qualifying child. The income phase-out for the Child Tax Credit was also increased from $110,000 to $400,000 for joint filers, making the tax credit available to more taxpayers.
The increase in the Child Tax Credit, which is partially refundable, is about the same as the amount of the personal exemption for dependent children, assuming a 24% tax bracket.
College Student Tax Penalty
Unfortunately, the child tax credit is available only for children under age 17. Accordingly, most college students will not be eligible for the Child Tax Credit.
Instead, they may be eligible for a new tax credit for other dependents. This nonrefundable tax credit is worth up to $500 per qualifying dependent. Qualifying dependents include children age 17 or 18 who live with the taxpayer and children under age 24 who are enrolled in college full-time. A child’s age is measured as of December 31 of the tax year.
Thus, parents of college-age children lose the personal exemption for these children and the personal exemption is not replaced by the increase in the Child Tax Credit. Instead, the new tax credit for other dependents covers less than half of the lost personal exemption, assuming a 24% tax bracket.