The term “exemption” is often one that inspires bewilderment and perplexity among the most intelligent individuals. When filing your personal tax return or even filling out a W-4 for your employer, you may not be sure what exactly an exemption is – and you certainly do not want to ask and look like an idiot. So, what is a tax exemption?
The technical explanation of an exemption is the set amount of income that is “exempt” from taxation based on yourself, your spouse, and the number of dependents you can claim. For 2005, the amount per exemption you can claim is $3,200. So, this is an automatic decrease in your taxable income by $3,200 for each person in your house, assuming you can claim the extra people in your house as your dependents. In simpler terms, it is a “gimme” from Uncle Sam to reduce your tax burden based on the number of people you support.
You can always claim yourself as an exemption, assuming no one else is entitled to claim you as a dependent on their taxes. Likewise, if you are married and filing a joint return, you are also entitled to an exemption for your spouse. If you are married and filing separately, you may only claim your spouse as an exemption if they had no income for the tax year, is not filing a tax return, and can not be claimed as a dependent by anyone else.
Exemptions for dependents are a little more complicated, simply because of the complex nature of dependent status. You can claim a person as a dependent if they are a qualified child or a qualified relative.
To be a qualified child, the individual must be your son, daughter, stepchild, eligible foster child, brother, sister, half brother, half-sister, stepbrother, stepsister, or a descendant of any of them; must be under the age of 19, or 24 if they are a full-time student, or completely disabled; the child must have lived with you over half of the year; the child could not have provided over half of their own support; and can not be eligible as a qualified child on anyone else’s return.
A qualified relative is someone that does not meet the criteria to be your qualified child or anyone else’s; is related to you as specified by statute, or lived with you the entire year as a member of your household; has a gross income less than $3,200; and you had to have provided over half of the person’s support.
While there are a few specific requirements explained with complicated terminology, for the most part, a dependent is someone you supported for most or all of the year, that no one else can claim, and meets certain relationship criteria. Once you clarify who your dependents are, this number, in addition to yourself and your spouse, is the number of exemptions you may claim.