How Exemptions and Dependents Can Reduce Taxable Income

From the Desk of Michael T. McCormick

How Exemptions and Dependents Can Reduce Taxable Income

Most taxpayers can claim an exemption for themselves and reduce their taxable income on their tax return. They may also be able to claim an exemption for each of their dependents. Each exemption normally allows them to deduct $4,050 on their 2016 tax return. Here are six key points to keep in mind on dependents and exemptions:

1. Personal Exemptions. Taxpayers can usually claim exemptions for themselves and their spouses on a jointly filed tax return. For married taxpayers filing separate returns, an exemption can only be claimed for a spouse if that spouse:

• Had no gross income,
• Is not filing a tax return, and
• Was not the dependent of another taxpayer.

2. Exemptions for Dependents. A dependent is either a child or a relative who meets a set of tests. Taxpayers can normally claim dependents as exemptions. List a Social Security number for each dependent.

3. No Exemption on Dependent’s Return. If a taxpayer can claim a person as a dependent, then that dependent cannot claim a personal exemption on his or her own tax return. This is true even if no one claims that person on a tax return.

4. Dependents May Have to File. A dependent may have to file a tax return. This depends on certain factors like total income, whether they are married and if they owe certain taxes.

5. Exemption Phase-Out. Taxpayers earning above a certain amount will lose part or all the $4,050 exemption.

6. Divorce. When parents separate or divorce, the question of who is entitled to claim the dependency deduction for a child often arises. Individuals contemplating a separation or divorce, or planning to re-marry, should explore their eligibility to claim any dependent children, including those of a spouse-to-be. Final regulations issued by the IRS under Internal Revenue Code Section 152 contain the rules that govern who may claim dependency exemptions in these types of situations. A taxpayer can only claim a dependency deduction for a qualifying child or relative. Support and custody rules also impact a parent’s ability to claim a dependent child’s personal exemption. IRS regulations require a noncustodial parent to attach to his or her tax return a release of claim to an exemption that has been properly executed by the custodial parent. A court order or decree or separation agreement cannot serve as the release of claim. By providing written notice to the noncustodial parent, the release of claim may be revoked, although such revocation is not binding until the year following the notification.