President Trump’s tax reform is in full swing, and state tax authorities’ conformity to the new law is casting doubts on personal exemptions in some states. An overview of these exemptions can help handle tax situations if you have high-net-worth clients in more than one state.
Under the Tax Cuts and Jobs Act of 2017 (TCJA), the federal personal exemption is suspended through 2025, balanced by such other provisions as the near doubling of the standard deduction and an enhanced child tax credit. Some states have mirrored the federal government’s new take on personal exemption; others set their own dollar amounts.
“Many states set their own exemption amount, and from what I have seen so far, many states maintained their exemptions for 2018,” said Kathleen Keylor, a CPA and director of tax services at MAI Capital Management in Cleveland.
Six states saw the repeal of their personal exemptions under TCJA, while legislators in another five states acted to preserve exemptions that might otherwise have been wiped out, according to a recent report from the Tax Foundation. Minnesota, for instance, would lose its personal exemption if the state updated its conformity statute without expressly providing for its retention.
“When federal lawmakers suspended the personal exemption for the tax years between 2018 and 2025, that decision had ripple effects in the states, many of which incorporated the provision into their own tax codes,” Jared Walczak, senior policy analyst with the Center for State Tax Policy at the Tax Foundation, wrote in a recent foundation blog. “Whereas most other individual income tax changes under the TCJA proved fairly straightforward for states to incorporate, zeroing out the personal exemption created significant uncertainty in some states and, for a few, took much of the year to sort out.
“The TCJA was enacted as a reconciliation bill, under Senate rules which limit debate and amendments for budget reconciliation measures. The reconciliation process made it easier to enact tax reform, but it came at a cost of legislative flexibility,” Walczak added. “Many individual income tax provisions, in particular, are temporary, yielding provisions that are zeroed out rather than repealed out. The personal exemption statute is still necessary, as it might be restored in 2026.”
States vary widely in how they treat exemptions. Kentucky, Pennsylvania and North Carolina have no personal exemption, for instance, and Missouri, North Dakota, New Mexico, Colorado, Idaho and Utah eliminated the personal exemption after the tax reform law was passed.
“Six states which previously offered personal exemptions eliminated them in line with federal law, while a seventh state (Kentucky) eliminated its personal exemption as part of a broader tax reform. Five states took legislative action to restore a personal exemption that would have been eliminated otherwise,” the Tax Foundation report said.
Overall, Keylor said, federal tax reform hasn’t had a significant impact on state taxes in Ohio. “Ohio income starts at federal AGI, so there was no benefit of itemized deductions for Ohio purposes. Ohio has maintained the personal exemption as well and increased it slightly for 2018,” Keylor said.
In some states, a deduction or exemption is provided for each filer, spouse and dependent in an amount set by the state, according to Walczak, but more frequently states establish a personal exemption amount that might differ from what the federal government offered—$2,250 in Kansas, for instance, $1,000 in Michigan—and then provide a state exemption in that amount for each exemption allowed the taxpayer.