Exemptions and the Dependency Test
In computing how much of your income is actually subject to federal income tax, you're automatically entitled to subtract two amounts: a personal exemption, and a standard deduction. The sum of these amounts is not taxed, period. Of course, you can choose to itemize your deductions rather than claiming the standard deduction, if itemizing would result in a lower tax bill. The remainder of this section explains personal exemptions and how to determine whether a particular person is your dependent or not.
The rule is that one (and only one) personal exemption is available for every individual - adult or child. The amount of the exemption is $3,400 for 2007. This amount is indexed for inflation every year.
So, on a joint return in 2006, you could automatically claim one exemption for yourself and one for your spouse, for a total of $6,800. You can claim an exemption for your spouse even if he or she died during the year, provided you have not remarried. However, if you obtain a final decree of divorce, you can't claim your spouse's exemption.
If you are married filing separately, you can claim your spouse's exemption on your own return only if your spouse had absolutely no gross income for the year and was not the dependent of any other individual.
Besides the personal and spousal exemptions, you should also claim an exemption for each of your dependents. The catch is that if you can claim a dependency exemption for an individual, that person may not claim a personal exemption on his or her tax return.
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Warning
There is nothing optional about this rule. If you are eligible to claim, say, an exemption for your child who is away at college, you cannot choose to let the child claim his or her own exemption even if you want to. This is true even if you are going to lose some or all of your personal exemptions because your income is too high.
One possible way around this rule is to make a hefty gift to the child in one year, and then refrain from paying more than half of the child's support in later years. The child could use the gift money to support himself or herself and could then claim the personal exemption on his or her own return.
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Dependency exemptions have their own set of rules, including:
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