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A SHORT COURSE IN PERSONAL AND DEPENDENT EXEMPTIONS

Gregory S. DuPont March 5, 2019

Basic income tax planning starts with an understanding of how various types of income are taxed, what kinds of deductions are allowable, and where the “break points” fall in applying the tax rates. One area that tends to be overlooked is the treatment of exemptions, which will be the focus of our discussion.

Taxpayers often confuse exemptions with deductions. Deductions are personal expenses, such as home mortgage interest, state and local taxes, and charitable contributions, that the IRS allows a taxpayer to subtract in order to determine gross income. All taxpayers may either claim a standard deduction ($6,200 for single filers and $12,400 for joint filers in 2014) or itemize their deductions. In general, taxpayers itemize deductions when their qualified deductible expenses exceed the standard deduction or if they do not qualify for the standard deduction. Exemptions, in contrast, are reductions in gross income that reflect all the people who rely on a particular taxpayer’s income. Personal and dependent exemptions are claimed in addition to the various deductions, either standard or itemized, that a taxpayer may take. For tax year 2014, each exemption claimed reduces your taxable income by $3,950.

The Who’s Who of Exemptions

Every taxpayer may claim a personal exemption, unless he or she is being claimed as a dependent on another taxpayer’s return. A married couple filing a joint return will claim two personal exemptions, one for each spouse. Even if one spouse has no income, that spouse is not considered the “dependent” of the other spouse for tax purposes.

Things get a little more complicated with respect to dependent exemptions. Since this is a “short course,” we will focus on the basic qualification rules of relationship, support, and gross income.

Generally, a dependent must either be related to the taxpayer or be a member of the taxpayer’s household for the entire year. Examples of individuals who are considered related include children, siblings, parents, and, in some cases, in-laws. For dependent qualification purposes, relationships established by marriage are not terminated by divorce or death of a spouse. 

In terms of support, a person must have received more than half of his or her total support from the taxpayer (or from two or more individuals if under a multiple support agreement).

With respect to gross income, a dependent cannot receive gross income equal to or greater than the exemption amount ($3,950 for 2014). The gross income requirement does not apply to a taxpayer’s child under age 19 or age 24 if he or she was a full-time student for at least five months of the year.

Claiming an exemption for a dependent is a “use it or lose it” proposition. For example, let’s take the hypothetical couple Maria and Peter. Let’s assume that they can claim their son, Tyler, as a dependent. Tyler is a student who works part-time and must file a tax return. Can Maria and Peter decide not to claim Tyler so that he can claim a personal exemption for himself on his own return?

In a word, no. The fact that Tyler could be claimed as a dependent by his parents precludes his claiming a personal exemption on his return. Quite simply, the person entitled to claim the exemption must do so or lose it as a tax benefit.

Remember, This Was the Short Course

Simplicity can readily give way to complexity in trying to determine if a person qualifies as a dependent for tax purposes. Divorce presents one of the most common situations where this can happen: Does the custodial or noncustodial parent have the right to claim dependent exemptions?

Because other rules may apply and the facts are not always clear-cut, sometimes it may be necessary to go beyond the short course to find information not presented here. For those embarking on the long course, a qualified tax professional can assist you in gaining a better understanding of exemptions.