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Tax exemptions reduce taxes, but are reduced for some filers

Personal exemptions are one way for taxpayers to reduce their adjusted gross income to a lower taxable income amount. Remember, the less money that the Internal Revenue Service can tax, the smaller your eventual tax bill.

Personal tax exemptions also are today's Daily Tax Tip.

Each of the three individual returns allows each filer to claim a personal exemption for him- or herself, as well as one for a spouse and eligible dependents. Don't be confused by the lack of specific mention of exemptions on the 1040EZ. It's there, but the exemption amount is included in the form's combined standard deduction/exemption figures.

Exemptions section for 2013 Form 1040

For the 2013 tax return you're working on now (or soon will be), the personal exemption is $3,900. For 2014 tax-planning purposes, the inflation-adjusted exemption amount is $3,950.

Here are a few things to keep in mind about exemptions.

Count yourself…most of the time.
In most tax return situations, you can claim a personal exemption for yourself.

The one time when you can't is when someone else is entitled to claim you as a dependent. This is common when a college student earned enough money to require that he/she file a tax return, but the youth's parents also can claim him/her as a dependent.

Note the "entitled to" wording. In these cases, the other taxpayer doesn't necessarily have to claim you, just be able to do so if the other taxpayer wishes.

So check with your parents or others who might be able to claim you as a dependent before either of you file your returns.

A spouse counts, too.
Married couples filing joint returns -- and this now means same-sex married couples, too -- can claim a personal exemption for both partners.

Accounting for dependents.
You generally can claim an exemption for each dependent listed on your tax return. In most cases, these are the requirements of children for whom the filer cared for during the tax year.

But in some cases, other folks, known as qualifying relatives even though they don't necessarily have to be related to you, can be claimed as exemptions.

Make sure you have, and show on your return, the Social Security number of anyone you claim as a dependent.

Smaller exemptions for wealthier filers.
Beginning with the 2013 tax year, personal exemption amounts are reduced incrementally for taxpayers with higher incomes.

The Personal Exemption Phaseout, known by the acronym PEP, had been part of the tax code years ago, but the 2001 tax act (often referred to as the Bush-era tax cuts) phased out the phaseout (don't you just love taxes!?), eliminating it entirely in 2010.

The American Taxpayer Relief Act of 2012 (ATRA), however, reinstated PEP. The one bit of good news is that ATRA also increased the income levels at which PEP kicks in.

For 2013 returns, you could lose some of your personal exemptions if your AGI is $150,000 and you're a married taxpayer filing a separate return; $250,000 as a single taxpayer; $275,000 if you're a head of household filer; and $300,000 for married couples filing a joint return. The PEP income ranges will be bumped up for 2014.

For this tax year's filing, your tax preparer or tax software will help you calculate how much of your exemption you'll lose.

If you're old school, you can use the worksheet on page 40 of the Form 1040 instructions.

You also might find these items of interest:


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Check out the link above on the requirements for claiming a dependent child. All five tests must be met, but there is no age limit for a child who is child is permanently and totally disabled. Kay

Brian Huber

Adding to your excellent discussion is the important point that tax software doesn't automatically know who a taxpayer is entitled to claim as a dependent. Rather, the decision falls upon each taxpayer's knowledge – or the expertise of the taxpayer’s CPA or Enrolled Agent tax professional. This is not always a simple matter to understand with many household arrangements. Placing the word “qualifying” before such terms as child and relative alters the common meaning of which individuals are children and relatives. Further complicating matters is that criteria for a “qualifying child” for purposes of the Earned Income Credit is distinctive from conditions for a “qualifying child” for purposes.

Pam Baggett

How about an adult child who is disabled?

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