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Dependent Exemptions and Exemption Planning Research Paper

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Updated: May 17th, 2022

In the US, individuals can be exempted from payment of taxes especially those with qualifying dependents. They have a right to claim exemptions for themselves as well as for their dependents e.g. a spouse, child or themselves. This is a deduction in the tax paid from the income taxes paid by individuals (Simon, 2012). The tax exemption amount has been increased in order to adjust for inflation each year. For example, for the year 2012, each person can claim $3,800 per annum which was increased from $3700 last year. Spouses are entitled to claim two personal exemptions if they have filed a joint tax return.

For a divorced parent, the parent who stays with the children for the longest time in the year can claim the exemption. In the previous years, high income earners were not allowed personal exemptions as their gross income exceeded certain limits, but this no longer applies.

Dependent exemptions are available for children under the age of 19 years, and therefore the parents can claim an exemption for each child. For the permanently disabled children, the age does not apply and therefore one can claim the dependent exemption if the child is disabled in any of the years. However, for this to apply, one must prove that the disabled child is related to him e.g. a child, grand-child, cousin, brother or sister, half-sister or brother, nephew and niece (Perez, 2011).

The Internal Revenue Service (IRS) has set rules to ensure that only the actual or real dependents are given the exemptions to avoid cases of frauds that may be committed by taxpayers who want to evade the payment of taxes. No parent can claim dependent exemptions for children who are non-residents of the US, Mexico or Canada

For children claimed as dependents, a parent cannot claim the exemption in the following circumstances:

  1. He himself is a dependent
  2. The child is not a full time student and less 19 years or more than 24 years,
  3. The child supports himself
  4. The child files a joint tax return with his wife if married
  5. The child is not staying with the parent or if the parent is divorced and has lived with child for less than 6 months during the year. The other time must have been spent with the ex-spouse.

Apart from children, a taxpayer can also claim a dependent exemption for his or her relatives who are supported by the taxpayer (Quickfinder, 2011). In this case, there is no particular age limit or residence with taxpayer required. The only prove needed is that the tax payer is supporting the qualifying relatives. However, for any taxpayer to claim for this exemption for relatives, the tax payer should:

  1. Prove that his gross income is less than $3800.
  2. Prove that he has supported the relatives for at least more than half of their support.
  3. Show that the relative is not married and therefore not filing separate returns.
  4. Prove that the relative is a resident of the US, Canada or Mexico.

The requirements mentioned above can apply if a taxpayer wants a dependent exemption for a friend as long as the friend has stayed with him or her for a whole year. It is clear that the amount of dependent exemption obtained by the taxpayer depends on the number of dependents that he or she has. Currently, each dependent can be given $3,800. For example, one who has three dependents can obtain a dependent exemption of $3,800 x 3 =$11 400.

For exemption planning purposes, the tax payer should be very careful in order to maximize the exemptions that he can obtain to reduce the tax burden. However, it is important for one to read through the IRS publications to know all the rules that apply to the various exemptions (Melville, 2011). For example, parents who are divorced can plan their tax returns in such a way that they can maximize their exemptions to get huge deductions from the income taxes paid. If A and B are divorced parents, whereby A holds custody of the child for more than 6 months during the year, A is entitled to claim for an exemption for the child if she prepares her tax returns separately since she has stayed with the child for the larger proportion of time than B. This applies even if B pays a larger proportion of his income to support the child. The exemption obtained can then be used to support the child in buying the basic needs.

A parent can also include all children as dependents so that he or she can claim the exemption for each child. However, the parent may be required to produce the Social Security Number for each of the dependents in order to fill out form 1040.There are some exceptions to this exemption and therefore requires the taxpayer to check the rules provided in the IRS (Lawyers.Com, 2012).

For other spouses who are able to fill a joint return, they can claim more than one exemption whereby each spouse can obtain an exemption. One can only be conversant with these rules if he or she reads through all the various rules provided and published in the IRS website or articles.

IRS has offered various online tools to help tax payers file their returns online, an interactive tax assistant and various tax benefits available for the tax payer as provided by the federal. Businesses can also enjoy various tax exemptions that may help them reduce their tax. Cost of goods expenses, personal expenses and capital expenses should be prepared separately (IRS, 2012). Any expenses for starting up the business and buying of assets for the business should all be capitalized for them to obtain capital allowance deductions. Other expenses that can help a business to obtain tax advantages include rent, taxes, insurance, interests, retirement plans and employees’ salaries as provided in the application number 535. This is important in reducing the tax burdens.

The amounts of exemptions in the past used to reduce with the increase in the level of income of the taxpayer. This was due to the phase out limits that existed in the previous years and are likely to resurface in the near future. Currently, there are no phase-out limits for the exemptions. This is very beneficial for the persons who earn high incomes and therefore can benefit from the exemptions to reduce their tax burdens. The method used in accounting can also reduce or increase the taxes payable by the business.

Exemptions therefore provide some tax advantages that all tax payers should know in order to reduce their income and business taxes.

References

IRS. (2012). Tax information for businesses. Web.

Lawyers.Com. (2012). Child tax exemptions, deductions and divorce. Web.

Melville, A. (2011). Taxation: Finance Act 2011. New Jersey, NJ: Pearson Prentice Hall.

Perez, W. (2011). Personal exemptions. Web.

Quickfinder, G. (2011). Ria Federal tax handbook. New York, NY: Thomson Reuters.

Simon, J. (2012). Economics of taxation. New York, NY: Harper.

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