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How Is the Dependent Exemption Calculated?

how tax return is calculated

No calculations are necessary when reporting dependent exemptions on your tax return.

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One of the ways many taxpayers reduce their income tax bill is by taking an exemption for each dependent they're eligible to claim. The nice thing about taking dependent exemptions is there's nothing to calculate. However, you will need to make sure that you satisfy either the qualifying child or qualifying relative requirements for each dependent exemption you report on your return.

How Exemptions Work

The Internal Revenue Service lets you take one dependent exemption for each qualifying child and qualifying relative, as well as one personal exemption for yourself and one for your spouse, if you are filing a joint return. These exemptions offer the same tax savings as a deduction in that they reduce your taxable income. Getting your taxable income as low as possible with exemptions is always beneficial since you'll end up paying less tax on the money you earn – especially if they keep you out of a higher tax bracket.

How to Claim the Exemption

Exemptions Are Fixed

There isn't much to think about as far as the exemption amount you're eligible for. This is because the

dependent exemptions, as well as the personal exemption, are fixed in amount each tax year. In other words, every taxpayer who claims a dependent will report the same exemption amount. Each tax year, the federal government increases the exemption amount for inflation. For example, in 2010 the exemption amount was $3,650, but has been increased for inflation to $3,900 for the 2013 tax year.

Qualifying Child Rules

Of the two types of dependents, exemptions for qualifying children are more common since this category covers your children, stepchildren, foster children and any descendant of the three. It also includes siblings and their descendants. All of these individuals must be under age 19, but if they attend school full time, they remain eligible until they turn 24. Each dependent must live with you for more than half of the tax year. And although there's no requirement that you financially support a qualifying child, the rules prevent you from taking an exemption if the child provides more than half of the funds for his own support. Lastly, an individual who files a joint return with a spouse except to obtain a tax refund of tax already paid is ineligible to be a qualifying child.

Qualifying Relative Rules

Category: Taxes

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