Exemptions

Exemptions

How much is an exemption worth?

What are the five rules used to determine dependency?

What if several people are supporting someone?

How much is an exemption worth?

An exemption lowers your taxable income by $2,500 per dependent

Value of the exemption depends on your marginal tax rate

For those in the 28 percent bracket, a dependent saves you $700 in taxes

What are the five rules used to determine dependency?

1. Citizenship

Dependent must be a US citizen or a resident of the United States, Canada or Mexico

2. Support

Dependent must get at least half of his support from you

3. Income

Dependent can not have over $2,500 in income

Exceptions

• Children under age 19 not subject to income limit
• Full-time students under age 24 not subject to income limit

4. Residency

Dependent must live with you the entire year or is your close relative

5. Joint return (little-used test)

Dependent doesn't file a joint return (unless to get a refund of all taxes)

What if several people are supporting someone?

Only one person can claim the dependent

Others must agree to this

Strategy : Let the supporter with the highest marginal rate claim the exemption

Use Form 2120