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Filing Taxes: What You Need to Know About Tax Exemptions

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Tax exemptionsBy Alden Wicker

Exemptions are one of the most straightforward parts of the tax code.

OK, maybe that isn't saying much, but when it comes to navigating tax season, we take what we can get. And we also love exemptions because they put money back in our pocket.

Exemptions work in a similar way as deductions by reducing the amount of income you will be taxed on. For each exemption you take for 2012, you can deduct $3,800 from your gross income to arrive at your taxable income. So if you fall in the 10% tax bracket, that translates to $380 less in taxes.

You are allowed to take exemptions for:
  • Yourself ("personal" exemption)
  • Your spouse
  • Each dependent
So if you are married with three qualifying children, you can deduct $19,000 in exemptions ($3,800 x 5 = $19,000). Not bad, right? It's a pretty easy portion of your forms to fill out, but-of course-there are some exceptions. Read on to find out more about each exemption and when you can take it.

Personal Exemptions

This is the exemption you can take just for being a taxpayer. It's the government's way of saying, "Thanks for being a contributing member of society!" And good news for high earners-previously, once you made a certain amount (around $165,000 to $200,000) you wouldn't be able to take the full personal exemption, but that rule doesn't apply this year.

The Catch: You cannot get a personal exemption if anyone else is able to claim you as a dependent. The emphasis here is on the able. Even if they don't take the exemption, just the fact that they are able to means you cannot claim it. (And you might want to ask them why they are letting this pass them by!) We explain who can be claimed as a dependent below, so check out that description if you are unsure, but in general, if you are being supported by someone else, you cannot take this exemption.

Spousal Exemptions

While your spouse is never considered a "dependent," similar rules apply here. If you are filing a joint return, you can claim your spouse for an exemption.

The Catch: If you are married filing separately, you can only claim an exemption for your spouse if:
  • He/she had no gross income
  • He/she is not filing a return, and
  • No one else can claim him/her as a dependent
Dependent Exemptions

Children.
If you have any children under 19 living with you, you most likely can take an exemption for each of them. If your child was permanently and totally disabled at anytime of the year, she can always be claimed as your dependent, regardless of age.

To meet this test, a child must be:
  • Your son, daughter, stepchild, foster child or a descendant (e.g. grandchild) of any of them, or
  • Your brother, sister, half brother/sister, stepbrother/sister or a descendent (e.g. niece or nephew) of any of them.
The Catch: The IRS wants to know that your kids are actually dependent on you. So you cannot claim your child as a dependent if:
  • You yourself are being claimed as a dependent by someone
  • Your child is married and filing a joint tax return (unless he/she is filing just to claim a refund of withheld tax and isn't taking a personal exemption)
  • Your child is not a resident of the U.S., Mexico or Canada
  • Your child is over 19 and not a full-time student
  • Your child is 24 or older at the end of the year
  • Your child provided more than half of her own support
  • Your child didn't live with you for half the year (except in cases of illness, education, business, vacation or military services, or the child was born or died during the year)
  • You are separated or divorced, and your child spends more time at your ex-spouse's home. (Learn more about this at the IRS website.)
Relatives. But your kids aren't the only types of dependents you can claim exemptions for. You can also take exemptions for "qualifying relatives." A relative does not have to live with you and there is no age requirement in order to qualify, you just need to be supporting them.

The Catch: In order to be a qualifying relative, the person must:
  • Have earned less than $3,800 in gross income or unemployment benefits for the year 2012
  • Have received more than half of their support from you, in the form of food, clothing, shelter, education, medical and dental care, recreation and transportation. To figure out whether the relative meets this test, add up all the support they got during the year (including support from the state like welfare and food stamps) and compare what you contributed to see if it is more than half.
  • Be a U.S. resident or citizen, or a resident of Mexico or Canada
  • Not be married filing jointly
In addition to the children mentioned above, qualifying relatives could be your:
  • parent
  • sibling
  • stepparent
  • stepsibling
  • half sibling
  • grandparent
  • grandchild
  • Any in-law: son-, daughter-, mother-, father-, brother- or sister-in-law
Cousins do not count. And aunts, uncles, nephews and nieces only count if they are related to you by blood. For example, your husband's sister's daughter does not count if you are married filing separately, but your sister's daughter does. However, the relationship need be present to only one of the two married persons who file a joint return. That means if you are married filing jointly, you can claim your husband's sister's daughter.

Member of Your Household. What if your best friend lived with you all last year? Or your best friend's little girl? You might be able to claim them as a dependent. They must have lived with you all year, and meet all the other requirements that apply to qualifying relatives, including:
  • Have earned less than $3,800 in gross income or unemployment benefits for the year 2012
  • Have received more than half of their support from you, in the form of food, clothing, shelter, education, medical and dental care, recreation and transportation
  • Be a U.S. resident or citizen, or a resident of Mexico or Canada
  • Not be married filing jointly

See more on LearnVest:

Don't Miss Any of These Money-Saving Tax Credits
Will You Get Hit With the Dreaded Alternative Minimum Tax?
10 Crazy Tax Laws You Need to Know


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