Federal Income Tax Course - Chapter 6 - Personal And Dependency Exemptions

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An Exemption

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is a dollar amount that can be deducted from an individual's total income, thereby reducing the taxable income.

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Taxpayers can claim 2 kinds of exemptions:

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1) Personal exemption

2) Dependency exemption

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The amount taxpayer can deduct for each exemption is

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$3,900 for 2013

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Exemptions allowed on the taxpayer's tax return

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personal exemption, exemption for taxpayer's spouse if filing jointly, dependency exemptions for qualifying dependents. A taxpayer can claim one exemption for each dependent.

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You cannot claim any dependents if

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you, or (if filing jointly) your spouse, could be claimed as a dependent by another taxpayer.

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You cannot claim a married person who files a joint return, as a dependent, unless

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that joint return is only a claim for refund and there would be no tax liability for either spouse on separate returns

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You cannot claim a person as a dependent unless

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that person is a US citizen, US resident alien, US national, or a resident of Canada or Mexico

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You cannot claim a person as a dependent unless

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that person is your qualifying child or qualifying relative

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Test to be a qualifying child

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1) It must be your child, stepchild, foster child, bro, sis, half bro, half sis, stepbro -sis, or a descendantof any of them.

2) Child must be under age 19 at the end of the year and younger than you, or under age 24 at the end of the year, a full-time student and younger than you, or any age if permanently or totaly disabled

3) Child must have lived with you for more than half a year

4) The child must not have provided more than half of his or her own support

5) The child is not filing a joint return for the year (unless only for a refund)

6) You must be the person entitled to claim the child as a qualifying child,

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To be a qualifying relative

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1) The person cannot be your qualifying child or the qualifying child of any other taxpayer

2) The person is either - a relative who do not have to live with you, or - must live with you all year as a member of your household

3) The person's gross income for the year must be less than $3,900

4) You must provide more than half of the person's total support for the year.

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The taxpayer's spouse can be claimed as a personal exemption on a return if these conditions are met:

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1) The taxpayer must be married by Dec 31 of the tax year

2) The taxpayer's spouse cannot be claimed as a dependent on another person's tax return, even if the other taxpayer does not claim this person as a dependent.

3) The taxpayer files a joint return or a separate return and the spouse had no gross income.

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A dependent is

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a person other than the taxpayer or spouse who entitles the taxpayer to claim a dependency exemption.

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Tests required for all dependents:

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1) Citizen test (citizen or resident of US, Canada or Mexico)

2) The joint return test ( individuals cannot be claimed as dependents if they filed a joint return for the same taxable year, unless the dependent and spouse had no tax liability and files only to claim a refund)

3) The taxpayer or spouse if filing jointly must not be claimed as a dependent on someone else's return.

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Dependents who meet the criteria of the Citizen and Joint Return tests must also meet all four Qualifying Child tests, which include:

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1) Relationship Test

2) Support Test

3) Residency Test

4) Age test

A taxpayer can take one exemption for each dependent who meets all four tests.

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Relatives who meet the relationship test include:

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child, grandchild, great grandchild, stepchild, brother, daughter, half bro, half sis, stepbro, stepsis, parent, grandparent, any other direct ancestor (but not foster parent), stepmother or stepfather, son or daughter of your brother or sister, father-in-law, mother-in-law, daughter-in-law, son-in-law, brother-in-law or sister-in-law.

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Cousin

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does not meet the relationship test, he (she) must live with the taxpayer for entire year to meet the relationship test.

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A person who died during the year and met the relationship test or was a member of the taxpayer's household until death meets the test,

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and may be claimed as an exemption.

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For federal income tax purposes

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a relationship established by marriage, such as mother-in-law or sister-in-law, does not end with divorce or death of a spouse.

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The dependent cannot meet the tests to be another taxpayer's qualifying child for the tax year

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even if that other taxpayer is not claiming them as a dependent.

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The Gross Income Test.

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The person cannot have income that exceeds or equals the exemption amount (does not include welfare benefits or nontaxable social security benefits)

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The support test.

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For an individual to be considered a dependent, the taxpayer must have provided more than half the person's total support for the entire year. To determine how much support the taxpayer provided, compare the taxpayer's contributions with the entire amount of support the person received from all sources, including the dependet's own funds.

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You may need to ask the taxpayer about the dependent's own sources of support, for example:

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1) Income received, both taxable and nontaxable

2) Savings accounts (saved and invested)

3) Borrowed amounts, such as student loans and car loans

4) Tax-exempt income, including SS benefits, life insurance proceeds

5) Nontaxable pensions, gifts, and tax-exempt interest

Only the amount of a dependent's funds that is actually spent on support is counted.

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Multiple support

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exception that applies when two or more people together provide more than half of an individual's support, instead of just one person providing the support. In this situation, anyone who separately provides more than 10% of the person's total support and meets the other tests is eligible to claim an exemption for the dependent. However, only one person can claim the exemption. The taxpayer's decide among themselves who will take the exemption for the year.

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The taxpayer's who provided more than 10% of total support for the individual

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decide among themselves who will take the exemption for the year and must sign a written statement agreeing not to claim the exemption for that year. From 2120 - Multiple Support Declaration. The person who is claiming the exemption must attach this form to his or her current year's tax return.

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Form 8332 - Release of Claim to Exemption for Child of divorced or Separated Parents

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used to shift the exemption from a custodial parent to a non-custodial parent. The custodial parent will still have a right to claim the Head of Household filing status, the Earned Income Tax credit and the Dependent Care Credit. If waived, the non-custodial parent claims the $1,000 Child Tax Credit along with the Dependency Exemption.

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The parent that has custody of the child for the greater part of the year (custodian) will generally be considered

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as having provided over half of the child's support.

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Exemptions are claimed on lines

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6a through 6d of forms 1040 and 1040A.