Tax Strategies for Personal and Dependent Exemptions

A personal exemption, in theory, is equivalent to the minimum amount a person would need to get by on at a subsistence level. The idea is that a citizen’s basic subsistence should be exempt from income tax. Of course, the personal exemption amount for 2010 ($3,650, less than half of the poverty line for an individual) would be hard to stretch into a year’s food, clothing, and shelter. However, taxpayers with a family to support can use the personal and dependent exemptions tax strategy to claim not only exemptions for themselves, but dependent exemptions for close individuals such as children and nonworking spouses.

In order to claim someone as a dependent on your tax form, you must be providing at least half of that person’s support. If the person is a blood relative or your spouse, they do not need to be living with you for the duration of the year, but otherwise cohabitation is a requirement of the dependent exemption tax strategy. The gross income of this dependent must be less than the personal exemption amount for that tax year. However, if the individual is under 19, or under 24 and a full-time student, the tax strategy of claiming them as a dependent can still be used.

In addition, your dependent must be a U.S. citizen, or else must be an adopted child who lived with you in a foreign country for the duration of the year. Foster children can be claimed using this tax strategy, but not children for whom you received payment from a government agency for taking care of them.

Married couples can file a joint tax return and each can claim themselves as a personal exemption on the return, even if one spouse earned no income in that year. This is part of the reason why filing a joint return is a common tax strategy for couples.

There are exceptions to the tax strategy of claiming personal exemptions. If you are eligible to be claimed as a dependent on someone else’s tax return, you cannot use the personal exemption on your own return. This applies even if the person chooses not to claim you as a dependent. If your spouse can be claimed as someone else’s dependent, you and your spouse must use the tax strategy of filing separate returns.

If you supported your spouse for part of the year, but by year’s end you have divorced, you cannot use the dependent exemption tax strategy to claim him or her on your return.

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