It is important to think about tax exemptions when filing a federal return. You may be able to claim allowances for yourself and your spouse (personal) and for children and some kinds of relatives (dependents).
This could help lower your taxable income and save you money. How does a federal tax exemption work and how should a taxpayer claim?
What is a Federal Tax Exemption?
Most, but not all, taxpayers will be able to claim exemptions to reduce their taxable income. This system gives you an allowance that is used to off-set some of your gross income and therefore reduce your tax liability. In some cases, you may only be eligible for a personal exemption; in others you may also be able to include allowances for any dependents you have.
How do Tax Exemptions Work?
Each exemption is set at $3,650. So, for example, if you only qualify on a personal basis, then you would reduce your taxable income on your return by this sum. If you can also claim for your spouse, then your income could be lowered by $7,300 (2 x $3,650). Add one child or a qualifying relative under the dependency rules to the mix, and you could reduce it by $10,950 (3 x $3,650).
What are Personal Exemptions?
You can claim a personal exemption for yourself and for your spouse if you are married and opt to file jointly. It is, however, sometimes possible to do this and to file separately provided that your spouse has no gross income and will not file their own return.
Although most people will be eligible here, some won’t qualify if another taxpayer could claim them as a dependent, even if a claim is not made on their return. There are also special rules governing divorces, separations and death.
What are Exemptions for Dependents?
If you have children or relatives that qualify for dependency status, then you may be able to claim exemptions for each of them as well as on a personal basis. This can be a simple process for many taxpayers, although some may find it more complicated to prove qualifying status.
Eligibility as a dependent is measured by various factors (including age, relationship, support, residency and income). There are five tests for children and four for relatives. The IRS guidelines here can be complicated. In some cases, for example, a parent may not be able to claim for a child under dependent children status, but may be allowed to use them as a qualifying relative.
How to Claim Exemptions With a 1040EZ, 1040A or a 1040
You can claim personal tax exemptions on federal tax form 1040EZ. But, this form cannot be used for dependency exemptions. If you will be claiming for children or relatives as dependents, then you will need to use a 1040A or a 1040.