Personal exemptions and exemptions for dependents form a basic part of the U.S. individual income tax law. Knowing the criteria and requirements for claiming these exemptions will facilitate the preparation of your individual income tax return and will ensure that you don’t miss out on this important tax benefit.
Overview
Exemptions are fixed amounts, on a per person basis, that reduce the amount of your income that is subject to income tax. The exemption amounts generally increase year by year and can be found in the Internal Revenue Service (IRS) instructions and publications issued each year, which are available on the IRS website.
There are two types of exemptions:
Personal exemptions
Exemptions for dependents
These two types of exemptions are for the same amount per person, but different rules apply in order to be able to claim the exemptions.
Personal Exemptions
You can generally claim one exemption for yourself. And if you are married, you may be able to claim an exemption for your spouse. These are the personal exemptions.
But if you can be claimed as a dependent by another person, you cannot claim a personal exemption for yourself, even if the other person that qualifies to claim you does not actually claim you as a dependent. You will need to review the rules for claiming an exemption for dependents to see if you yourself can be claimed as a dependent by someone else. If it turns out that you cannot claim your own exemption but someone else, such as your parent, can, you may want to let that person know, so that the exemption is not lost.
You can claim an exemption for your spouse only because you are married. Your spouse is never considered your dependent for tax purposes, and that is why an exemption for your spouse is considered a personal exemption.
If you are married filing jointly, you can claim two exemptions – one for yourself and one for your spouse. But if you are married filing separately, you can claim the exemption for your spouse only if:
your spouse had no income,
is not filing a return, and
cannot be claimed as a dependent on someone else’s tax return, regardless of whether that person actually claims your spouse as a dependent.
If your spouse died during the year and you would have been able to file a joint return, you can still claim an exemption for your deceased spouse, provided you did not remarry before the end of the year.
If you are a surviving spouse with no income and you remarry before the end of the year:
You can be claimed as an exemption on the final return of your deceased spouse, if a separate return is filed, and
You can also be claimed as an exemption if your new spouse files a separate return.
If you file a joint return with your new spouse, you can only be claimed as an exemption on that joint return.
If you obtained a final decree of divorce or separate maintenance during the year, you cannot claim an exemption for your former spouse, even if you provided all your former spouse’s support.
Exemptions for Dependents
In order to claim an exemption for a dependent, there are five dependency tests that must be met. And the person who qualifies as your dependent cannot claim a personal exemption on his or her own tax return.
Dependency tests:
Member of household or relationship test
Citizen or resident test
Joint return test
Gross income test
Support test
Qualifying Child Tests
Beginning in 2005, the IRS has standardized its criteria for a “qualifying child” for purposes of the dependency exemption, head of household filing status, earned income credit, child tax credit, and the credit for child and dependent care expenses, resulting in a uniform definition of a qualifying child for all these purposes. There are four tests that must be met in order to claim someone as a qualifying child:
Relationship test: The child must be your child, including an adopted child, stepchiled or foster child, your brother or sister, step-brother or step-sister, nephew or niece.
Residency test: The child must live with you for over half the year, except for temporary absences for school, vacation, medical care, or military service, for example.
Age test: The child must be under age 19 at the end of the year, or under age 24 if the child is a full-time students. If the child is permanently and totally disabled, there is no age restriction.
Support test: The child cannot have provided over half of his or her own support during the year.
General Tests for Dependents
A dependent does not have to be your child. As long as the person meets the following tests, he or she can be claimed as your dependent.
1. Member of household or relationship test:
The person must either:
have lived in your home as a family member all year, or
must be related to you.
Temporary absences because of illness, education, business, vacation, or military service do not disqualify a person from being considered a member of your home. And, if a person is placed in a nursing home, the absence is considered temporary and does not disqualify the person according to this test.
The following relatives do not necessarily have to live in your home all year in order to meet this test:
Your grandchild, great grandchild, etc.
Your brother, sister, half brother, half sister, stepbrother, or stepsister
Your parent, grandparent, or other ancestor, but not your foster parent
Your stepfather or stepmother
Your aunt or uncle (brother or sister of your father or mother)
Your niece or nephew (son or daughter of your brother or sister)
Your father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law.
According to the uniform definition of a qualifying child, in order to be claimed as a dependent, the child must have lived with you for more than half the year.
Family relationships that were established by marriage are not ended by death or divorce for purposes of the dependency tests.
2. Citizen or resident test:
The dependent must be a U.S. citizen or resident, or a resident of Canada or Mexico. However, there are some exceptions.
If you were a U.S. citizen when your child was born and the other parent is a nonresident alien, you can claim a dependent exemption for the child, provided the other dependency tests are met, even if the child lives abroad.
If you are a U.S. citizen who has legally adopted a child who is not a U.S. citizen or resident you can take the exemption, provided the other dependency tests are met, if the child lives in your home as a member of your household for the entire year.
A foreign exchange student that you have in your home for a temporary period is generally not considered a U.S. resident and therefore does not meet the citizen or resident test.
3. Joint Return Test
You generally cannot claim an exemption for a dependent that files a joint tax return. However, if the dependent files a joint return only in order to claim a refund of taxes withheld, and neither of the spouses would otherwise have to file a return and would not owe any taxes if they filed separate returns, you can claim an exemption.
4. Gross Income Test
In order to claim an exemption, the dependent must not have had gross income of over a cetain amount, which is generally the same amount as the exemption. This amount is published by the IRS each year. There are exceptions for:
Children under age 19 at the end of the year
A student under age 24 at the end of the year
Gross income includes all income in the form of money, property, or services that is not exempt from tax. Tax exempt income, such as social security payments, is not included in gross income.
Certain scholarship and fellowship grants are included in income. But scholarships received by students who are candidates for degrees and that are used to pay tuition, fees, supplies, books, and equipment required for certain courses may be excluded from gross income for this purpose.
5. Support Test
You must have provided over half of the person's total support for the year. In order to determine whether you provided over half the person’s support, you need to take into account the following:
The person’s own funds that were used for his or her support. This includes the person’s income (including tax exempt income such as social security benefits), savings, and amounts borrowed. But for purposes of the support test, a person’s own funds are not support unless they are actually spent for support.
The amount that others provided for the person’s support, including payments from governmental welfare agencies.
The expenses for the entire household where the person you supported lived. You then divide this total by the number of persons living in the household to determine how much corresponds to the dependent you supported.
Other expenses paid for the person you supported, such as clothing, education, medical and dental expenses not reimbursed by insurance, travel, recreation and others.
If you provide your dependent with lodging, the fair rental value of the property is considered as support. If the dependent lives in his or her own home, the fair rental value of the home is considered to be support provided by the dependent. If you live rent-free in your dependent’s home, the amount of support you are contributing must be reduced by the fair rental value of the lodging provided to you.
There are two exceptions to the requirement of providing more than half the dependent’s support:
Children of divorced or separated parents, and
Multiple support agreements, in which two or more persons provide support, but no one person provides over half the total support.
In the case of children of divorced or separated parents, the parent who has custody for the greater part of the year is generally considered as the parent providing more than half the child’s support, regardless of whether that parent actually provided more than half the support.
The custodial parent may release the exemption to the noncustodial parent by signing Form 8332 or a similar statement. This statement must then be attached to the tax return of the noncustodial parent who is claiming the exemption. This provision may also be stated in a decree or agreement of divorce or separate maintenance, and in this case, copies of the appropriate section of that agreement must be attached to the noncustodial parent’s tax return.
All child care payments actually received from the noncustodial parent are considered to be used for the child’s support.
In a multiple support agreement, where no one person provides over half the support, you can claim the exemption for the dependent if you provide over 10% of the person’s support and each of the other persons providing support signs an agreement not to claim the exemption for that year. The multiple support declarations of the other persons must be attached to the tax return of the person claiming the exemption. IRS Form 2120 – Multiple Support Declaration, can be used for this purpose.
Phase-out for Adjusted Gross Income Over a Certain Amount
There is a phase-out that will cause you to lose part or all of the benefit of your exemptions if your adjusted gross income is over a certain amount. These limits are based on your filing status (single, head of household, married filing jointly or qualifying widow(er), and married filing separately), and can be found in the IRS instructions and publications. The phase-out limit is the lowest for the married filing separately status, and is the highest for married filing jointly or qualifying widow(er).
If your adjusted gross income is over the phase-out limit for your filing status, you will need to complete the Deduction for Exemptions Worksheet in the instructions for Form 1040 or 1040A to determine the amount you can deduct for exemptions.