2 DefinitionAn exemption is a dollar amount that can be deducted from a taxpayer’s total income, thereby reducing the taxable income, and the tax.Exemption amounts are indexed for inflation and are generally updated every year.
3 Types Personal exemptions Taxpayers can generally claim one for themselves (and usually one for their spouse).Dependency exemptionsTaxpayers claim them for qualifying dependents (people they are supporting).
4 Personal Exemption – Criteria To claim a personal exemption, the taxpayer must be able to answer no to the intake question, "Can your parents or someone else claim you or your spouse on their income tax return?”This applies even if another person does not actually claim the taxpayer as a dependent.
5 Personal Exemption – Criteria (cont’d.) Taxpayers who could be claimed as dependents must claim "0" exemptions.They will not be able to subtract the exemption amount from their gross income and they may have to use a smaller standard deduction amount.
6 Personal Exemption - Marital A spouse is never considered the dependent of the other spouse.Married taxpayers filing jointly can take two personal exemptions if neither can be claimed as a dependent on another person's tax return,If one spouse files a separate return and the other spouse had no income and is not filing a return, the taxpayer can take an exemption for the spouse.If both file separate returns, each takes his/her own exemption
7 Personal Exemptions – Deceased Spouse A taxpayer whose spouse died during the tax year can generally claim the personal exemption for the deceased spouse, if the taxpayer:Did not remarry by December 31 of the tax year, andWas not divorced or legally separated from their spouse on the date of death, andWould have been able to claim the exemption under the rules for a joint or separate return.
8 Dependency Exemptions – General Principles You cannot claim any dependents if you or your spouse could be claimed as a dependent b y someone else.You cannot claim as a dependent a person who files a joint return (unless it’s just to claim a refund, and neither spouse would have a tax obligation if filing separately).You cannot claim as a dependent a person who is not a US citizen, national, permanent resident, or resident of Canada or Mexico.
9 Dependency Exemptions – General Principals (cont’d.) Dependents must be either a “qualifying child” or a “qualifying relative” of the taxpayer.“Child” does not always mean your child and your child is not always a “qualifying child.”“Relative” does not always mean a relative.First, determine if the person in question is your qualifying child or the qualifying child of someone else. If the person is no one’s qualifying child, check the criteria for qualifying relative.
10 Who is a Qualifying Child? Must be younger than taxpayer (or spouse) or disabledRelationship: taxpayer’s child, taxpayer’s sibling, descendents of these. Step and foster OKAge: under 19 (24 if full-time student) or disabledResidence: lived with taxpayer over half the yearSupport: child did not provide over half his/her support
11 Who is a Qualifying Relative? Not a qualifying child of anyoneRelative on list in Step 2, pg. C-5 (They do not have to live with taxpayer), orLived with taxpayer all year (member of household)Income below $3,650Taxpayer provided over half total support
12 Exception A child who is the qualifying child of a taxpayer who is: not required to file an income tax return, and eitherdoes not file a return or only files a return to get a refund of income tax withheldMay be a qualifying relative of a different taxpayer.
13 Notes on Member of Household /Relationship Temporary absences from the home do not affect the exemption if due to illness, education, business, vacation, military service, or placement in a nursing home.Relationships established by marriage (i.e. in-laws) do not end with divorce or death of a spouse; in-laws can still be qualifying relatives even if they do not live with the taxpayer.Cousins can be qualifying relatives only if they live with the taxpayer for the entire year.Unrelated persons can be qualifying relatives as long as they lived with the taxpayer all year.
14 Qualifying Child of more than one person A child maybe the qualifying child of more than one person, but only one of them can claim the child as a dependent.These persons may agree on who will claim the child, as long as they follow certain rules. For example, a parent may allow a grandparent to claim his or her child as long as the grandparent’s AGI is higher than that of the parent.If these persons do not agree and more than one person actually claims a child, the IRS will use its rules to determine which claim is valid.
15 Tax Benefits Involving Dependents Six tax benefits related to dependents usually go together (assuming the taxpayer qualifies for all). Taxpayers cannot divide them up as they wish.Dependency Exemption **Child Tax Credit **Head of Household StatusEarned Income CreditExclusion for Dependent Care BenefitsChild and Dependent Care Expenses** See Next SlideLook at the table
16 Tax Benefits for Divorced, Separated or Never Married Persons Divorce settlements may provide for a non-custodial parent to treat the child as a dependent.The custodial parent may sign Form 8332 authorizing the non-custodial parent to claim dependency.The parent who claims the child as a dependent may also claim the Child Tax Credit . The 4 other tax benefits remain with the custodial parent as they have a residency requirement.
17 Multiple SupportMultiple support means that two or more people together, who could claim the person as a dependent except for the support test, provide more than half the dependent's support.Multiple Support Agreements apply only to a qualifying relative, not to a qualifying child, andOnly one taxpayer can claim the exemption for a dependent with multiple support..Taxpayers who provide multiple support for a dependent decide among themselves who will take the exemption for the year. Volunteer tax preparers do not decide.
18 Multiple Support (cont’d.) Taxpayers who claim the exemption for a dependent must attach Form 2120, Multiple Support Declaration or similar statement, to their tax return.The other supporting taxpayers must sign Form 2120 (or similar statement) agreeing not to claim the exemption for that year. The person who claims the exemption must keep this written statement as a record.