How Additional Personal Allowance Works

In the US, the government has entrusted the Internal Revenue Service (IRS) to collect and collate all income tax returns filed by taxpayers. In certain situations, the IRS can use its discretion and legal mandate to allow the Additional Personal Allowance to single, widowed, or separated individuals who financially care for a minor (the agency must certify the minor is underage).

When applied, the additional tax allowance works like other standard US deductions; the IRS considers it a part of a taxpayer’s income not subject to taxation. Hence such a personal allowance reduces the individual’s tax liability. Regardless, the IRS generally taxes anything else that exists above the personal allowance (whatever remains after the taxpayer deducts the personal allowance) basing on the current tax rate. To qualify for the additional personal allowance, the person filing the tax return should financially support a minor.

Further, the IRS might charge the income tax on taxpayers based on different types and levels of income. These can be employment wages, state benefits, rental and trust income, self-employed benefits, pension earnings, and other benefits that the employee may earn from an employer. Such taxes are usually exempt on various income sources—for instance, the first $1,400 that the taxpayer makes from a rental property or the first $1,400 acquired in self-employment, specific dividends, and national lottery winnings.

Real-World Example of Additional Personal Allowance

Margaret is a widow who lives in Chicago, US, with Mary, her 14-year-old daughter. Margaret’s husband James died five years ago. This means their marriage ended; since she was no longer married, Margaret can no longer benefit from her partner’s financial and emotional support. Regardless, under the special IRS tax arrangement, Margaret successfully filed for and claimed an allowance beyond the standard personal allowance. Since her daughter Mary was below the legal age and was a full-time student who lived with her in the same household, Margaret’s application met the threshold set for taxpayers applying for additional personal allowance.

Further, being a widow, Margaret was careful not to apply for other related allowances that the law sets aside for married persons; she knew this could jeopardize her chances and annul her eligibility for future state support. The additional personal allowance that Margaret received from the IRS was invaluable in exempting her from paying more income tax on her earnings throughout the year; ultimately, this considerably improved the quality of Margaret’s entire family’s life.

History of Additional Personal Allowance

Since its introduction in 1913, personal exemptions have featured prominently as an essential part of the modern income tax regime. Initially, the US Congress set the amount for personal income tax to $3,000 (which is worth over $70,000 today); thus, the IRS expected few to pay the set income tax. However, since 1913 the tax regime has acquired other features, including various tax cuts and the standard deduction, that have partially offset the value of the exemption deadline. The concept of the additional personal allowance in the US starts with the introduction of personal tax exemptions on individual returns. The idea was simple—aside from the standard deductions, the concept intended that all personal income exceeding a specific basic level be subject to taxation, which policy ensured the IRS didn’t subject the poorest households in the US to the income tax.

From the outset, the IRS linked the tax exemption regime to factors like family size; this meant that families with more dependents would pay less tax. In time, the Tax Cuts and Jobs Act soon eliminated the personal exemptions; however, they substituted them with a raised child tax credit and standard deduction. Before 2018, the IRS allowed US taxpayers to claim a personal exemption both for themselves and each dependent; in 2018, this would have been $4,150, but the Tax Cuts and Jobs Act (TCJA) reduced the amount to zero—running through 2025. Overall, the TCJA increased the child tax credits and the standard deduction as a replacement for the earlier personal tax exemptions.

Although there were considerable limits on general personal exemptions, the IRS has since 1990 phased out personal tax exemptions at higher income levels. The phaseout started in 2017 at $313,800 for married couples and $261,500 for singles filing a return. But, again, the IRS phased out these personal exemptions ($436,000 for married couples and $384,000 for singles). Ultimately, the tax fathers gradually realized that the alternative minimum tax plan practically eliminated most taxpayers’ advantage in accessing the personal exemptions by increasing the chances that larger families would eventually owe the State the alternative minimum.

Significance of Additional Personal Allowance

The principle of the Additional Personal Allowance works on the premise that people of the same economic and social status should ideally be entitled to the same personal allowance. In a nutshell, people of the same income bracket should pay a similar income tax without extraneous factors.

When activated, many eligible taxpayers can take advantage of this system’s benefits and successfully claim the additional personal allowance (as long as they do not claim other allowances reserved for married couples); this considerably reduces their tax bill. Thus, many single people or those who are widowed or separated can potentially take advantage of this legal provision.

Other potential beneficiaries of the additional tax allowance might include parents who support full-time students and men whose wives are incapacitated and support a minor living in the same household.