Personal and Dependency Exemptions

Because people with children have greater expenses than those without, the tax law reduces their tax liability by allowing them to claim exemptions for themselves and any dependents. A taxpayer who cannot be claimed as a dependent by another can claim a personal exemption, adjusted annually for inflation, which is equal to $3700 for 2011. The taxpayer can also claim an exemption for each dependent that is equal to the personal exemption.

On Form 1040 or 1040A, exemptions are totaled and multiplied by the exemption amount, which is then subtracted from adjusted gross income. However, the personal and dependency exemptions are not available under the alternative minimum tax (AMT).

Previous to 2010, there was a phaseout of personal exemptions for taxpayers whose adjusted gross income was greater than a certain amount. However, for 2010-2012, there is no phaseout, so higher income taxpayers may claim the full amount of the deduction. When claiming deductions for dependents, the correct Social Security number or taxpayer identification number of each dependent must be listed on the return of the taxpayer claiming the deduction; otherwise, it will be denied.

If the taxpayer claims someone as a dependent, then the dependent cannot also claim the personal exemption. Dependents with income equal to or less than $950 will not be taxed and do not have to file income tax returns. Joint filers can claim 2 personal exemptions, even if one spouse has no income. If they file separate returns, then each can claim their own personal exemption. However, if one of the spouses earns no income and cannot be claimed as a dependent by anybody else, then the income earning spouse filing separately can claim the exemption of the nonworking spouse.

A dependent must also meet the resident or citizen test at least some time during the year when the dependency exemption is claimed. The dependent must be a:

• citizen or resident of the United States;
• United States national; or
• resident of Canada or Mexico.

If any the dependents do not have either a social security number or a individual taxpayer identification number, then the taxpayer who wants to claim the exemption should file Form SS-5 with the Social Security Administration or Form W-7 with the IRS if the dependent does not qualify for a social security number.

To claim the dependency exemption, the dependent must satisfy the requirements for a qualifying child or a qualifying relative.