Deductions and exemptions are key mechanisms for determining a taxpayer’s taxable income and, therefore, their tax liability. The IRS offered advice on dependent and exemption issues in “Tax Tips: Five Important Facts About Dependents and Exemptions (No. 2010-04), dated January 7, 2010. These points are summarized below:

1) There are two allowable exemptions: personal and for dependents. For their 2009 federal tax return, a taxpayer can deduct $3,650 per qualified exemption, reducing their taxable income. The amount of the exemption decreases for taxpayers with Adjusted Gross Income (AGI) above specific limits, based on their filing status.

2) A person claimed as a dependent by another taxpayer, whether their parent or someone else, is disallowed from claiming the Personal Exemption on their own federal tax return.

3) Your spouse is never considered your dependent. When filing jointly, the taxpayer can claim an exemption for themselves and their spouse. Note: Spouses are not defined as dependents for tax purposes. For taxpayers filing separately, they can only claim an exemption for their spouse provided the spouse is filing separately (if at all), has no gross income and is not claimed as a dependent on another taxpayer’s federal income tax return.

4) To claim a person as a dependent on a federal tax return, they must be a U.S. citizen, U.S. resident alien, U.S. national or a resident of Canada or Mexico for all or part of the tax year. Note: There is an exception for certain adopted children. In addition, a taxpayer cannot claim a married person as a dependent if they are filing a joint return with their spouse.

5) A person claimed as a dependent on another taxpayer’s federal tax return could still be required to file their own tax return based on the total of their marital status, income (unearned, earned or gross), any special taxes owed, and whether they received Earned Income Tax Credit (EITC) payments.

For more information on exemptions and deductions, taxpayers should review “Exemptions, Standard Deductions and Filing Information” (IRS Publication 501) and the IRS website. Taxpayers should also consult with CPAs, professional tax preparers or other tax practitioners for advice concerning their specific tax situation.

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