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