What You Need to Know About Tax Exemptions

Alden Wicker
Posted

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.

exemptions

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.