Reverse Planning for Exemptions

While those in lower income brackets will want to arrange their affairs to allow as many people as possible to qualify as dependents, it can sometimes pay to "reverse plan" for those in higher income brackets. If you stand to partially or completely lose your exemptions because of your high income, but you have dependents that have significant taxable income of their own from wages or investments, you might consider allowing some of your dependents to "lose" their dependent status in the future so they will be able to claim their own personal exemptions.

An added benefit of this strategy stems from the fact that individuals who may be claimed as dependents on your tax return are allowed a lower standard deduction on their own tax return. As long as they are considered dependents in 2007, they may claim only the greater of $850 or the amount of their earned income as a standard deduction. If dependent status is lost, they will be eligible for the full standard deduction for singles ($5,350 in 2007).

Example Mary and Carl Black file jointly, have one child, and have a taxable AGI of $250,000 for 2007. Their daughter, Carrie, is a college student who earns $6,000 in summer employment and also has $5,000 in investment income. It may be beneficial to have Carrie pay more than one-half of her own support so that she may claim a personal exemption on her tax return.