Document date: December 20, 2010
Released online: December 30, 2010
The dependent exemption reduces taxable income by a fixed amount ($3,650 in 2010) for each qualifying child in the family. Benefits depend on a family's marginal tax rate. Low-income families receive a tax reduction of up to $365 per exemption compared to high income families that receive a tax reduction of $1,278 per exemption. Benefits flow mostly to families with relatively high incomes. In 2010, TPC estimates 1.5 percent of benefits will accrue to families in the lowest income quintile while 57.1 percent of benefits will accrue to families in the top 40 percent of the income distribution.
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The dependent exemption reduces taxable income by a fixed amount ($3,650 in 2010) for each qualifying child or relative in the family. How much the exemption benefits particular families depends on their marginal tax rate. Low-income families, who would otherwise face a 10 percent tax rate see a relatively low benefit (a tax reduction of up to $365 per exemption) compared to high income families that face a 35 percent tax rate who see a relatively high benefit (a tax reduction of $1,278 per exemption). Beginning in 1985, the dependent exemption grows annually with inflation.
The exemption hasn't always been indexed, and as a percent of per capita income, the dependent exemption has shrunk considerably since its introduction in 1913. At that time, the dependent exemption was set at $3,000. This resulted in very few people paying taxes. As the value of the exemption declined, relative to personal income, programs like the standard deduction, Child Tax Credit, and the EITC were created and serve as partial replacements for the exemption.
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