CARL WATTS & ASSOCIATES

February 18, 2013

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
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If you are a taxpayer (earn income and file a tax return), you are most probably entitled to a personal tax exemption.

A tax exemption is a standard amount of money (defined each year by the IRS) that is not taxed.

For tax year 2013, the standard personal tax exemption is $3,900; for year 2012 the tax exemption was $3,800.

That means that for each person claimed on your taxes (which may include yourself, your spouse, and qualifying dependents), your taxable income will be reduced by the tax exemption set by the IRS for the respective year.

Usually the ability to claim exemptions phases out at certain income levels. There was no phase-out for 2010, 2011 and 2012, but the personal exemption phaseout (PEP) returned though in 2013.

The personal exemption phaseout affects your tax for 2013 when you have adjusted gross income above a dollar amount depending on your filing status:

  • Married filing jointly: $300,000;
  • Head of household: $275,000;
  • Single: $250,000;
  • Married filing separately: $150,000.

Note that these are amounts of adjusted gross income (AGI), not taxable income.

The amount of your personal exemption deduction is reduced by 2% points for each $2,500, or fraction thereof, by which your AGI exceeds the threshold amount for your filing status.

If your income exceeds the threshold by more than $122,500 ($61,250 if married filing separately), your exemptions are completely eliminated.

You usually may claim one exemption for yourself on your tax return if you cannot be claimed as a dependent on any other taxpayer's return, whether or not the other taxpayer chooses to claim you.

You also can claim one exemption for your spouse if you are married and file a joint return. If you and your spouse file separate returns, you may claim the exemption for your spouse only if he or she had no gross income, is not filing a joint return and was not the dependent of another taxpayer.

You may take one tax exemption for each person you claim as a dependent if all of the following statements are true:

1.
You (or your spouse if filing jointly) do not qualify to be claimed as a dependent on another person's tax return;

2. The dependent is not married filing jointly, unless the joint return is only a claim for a refund and there would be no taxes owed by either spouse if their returns were filed separately;

3.
The dependent is a United States citizen, U.S. national, resident alien, or resident of Canada or Mexico (unless they are a legally adopted child);

4.
The dependent is your qualifying child or qualifying relative.


A qualifying child must meet all of the following six IRS requirements to be your dependent for tax purposes:

1.
Relationship: the person must be your daughter, son, stepdaughter, stepson, foster child, sister, brother, half-sister, half-brother, stepsister, stepbrother, or a descendant of any of these, such as a niece or nephew.

2. Age: they must be one of the following:
  • Under the age of 19 on the last day of the year and younger than you (and your spouse if filing jointly);
  • A full-time student under the age of 24 on the last day of the year and younger than you (and your spouse if filing jointly);
  • Permanently disabled at any time during the year, regardless of their age.

3.
Support: They must have not provided more than half of their own support for the year (regardless of who did provide the support). Support includes food, actual or fair rental value of housing, clothing, transportation, medical expenses, and recreation.

4.
Residency: They must have lived with you for more than half of the year, except for temporary absences.

5.
Joint Return: They must not file a joint tax return for the year (if he or she is married).

6.
Qualifying Child of More than One Person: If they could be a qualifying child for more than one person, you must be the person who is entitled to claim the child.

A qualifying relative who, despite the name, doesn’t have to be related to you, must meet all of the following four requirements:

1.
Not a Qualifying Child: the person cannot be your qualifying child and cannot be someone else's qualifying child.

2. Relationship: the person must either have lived with you for the entire year as a member of the household (a person who is not actually related to you may meet the requirements in this way), or be related to you in one of the following ways: your child, stepchild, grandchild or other descendant of one of your children (or stepchildren or foster children), son-in-law, etc.. Also note that, for the purposes of this requirement, divorce or death does not change any relationship which was established by marriage (e.g. son-in-law, daughter-in-law, etc.)

3.
Gross Income: the person must have made less than $3,800 in gross income during 2012 (less than $3,700 for 2011).

4.
Support: you must have provided more than half of the individual's total support during the year.


Please note that even if you can claim someone else as your dependent on your tax return, that person may still be required to file his or her own tax return. Whether they must file a return depends on several factors, including the amount of their gross income (both earned and unearned income), their marital status and any special taxes they owe.

This may sound like “old news” to you, but it could still be worth clarifying the term personal tax exemption versus the terms standard deduction and withholding allowance.

The standard deduction is an amount set by the IRS that non-itemizers may subtract from their income and is based upon filing status. It is available to US citizens and resident aliens (for tax purposes) who are individuals, married persons, and head of household and increases every year. It is not available to nonresident aliens residing in the United States. Additional amounts are available for persons who are blind and/or are at least 65 years of age.

Together with your personal exemption amount, the standard deduction amount reduces your AGI to arrive at your taxable income. It's on the taxable income amount that your tax will be calculated.


Standard deductions for 2012 and 2013 are:
Filing status
2012
2013
Single & Married Filing Separately
$5,950
$6,100

Head of Household
$8,700
$8,950

Married Filing Jointly & Qualifying Widow(er)
$11,900
$12,200

Of course, if the total amount of your itemized deductions is higher than your standard deduction, then you should opt to itemize your deductions.

Personal exemptions free a specified amount of the employee's gross income from taxation on the employee's tax return. Withholding allowances free approximately the same amount of wages from income tax withholding and therefore approximate the employee's tax liability at the end of the year.

In this instance, exemptions and allowances may be used synonymously.


In addition to regular withholding allowances and standard deduction amounts, an employee may claim federal withholding allowances based on estimated tax adjustments and estimated deductions. The adjustments are the allowable adjustments the employee may take on the federal tax return and include itemized deductions, tax credits, trade and business deductions, moving expense deductions, direct charitable deductions, net operating loss carryovers, alimony payments, and net losses from business or farming.

Bottom-line, federal tax exemptions are considered the taxpayer's first-line of defense. They represent a deduction in taxable income to which every tax payer is entitled; even those with high adjusted gross incomes can still claim exemptions, although they might not be worth as much due to the phaseout provision.
Personal Tax Exemption
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