Exemptions and Standard Deduction (Tax course)

Barry and Bonnie are filing a joint return. They have three children under the age of twelve. How many personal exemptions can Barry claim?

2

Kinds of Exemptions

Adjusted gross income (AGI) is reduced by deductions and exemptions to arrive at taxable income. There are two kinds of exemptions: Personal exemptions Dependency exemptions Each exemption reduces the income that is subject to tax by the exemption amount. For 2016, the exemption amount is $4,050. Only one exemption is allowed for each person and the exemption can be claimed on only one tax return. For example, in the case of a divorced couple with one child, only one of the parents can claim the dependency exemption on their tax return.

The standard deduction is increased for which taxpayers?

Blind

Summary

Each exemption reduces taxable income by $4,050. Taxpayer and spouse may each be entitled to a personal exemption for themselves, and also can claim a dependency exemption for each qualified dependent. Taxpayers are also allowed to reduce taxable income by either itemized deduction or standard deduction. The standard deduction is determined based on the following: Filing status Age If taxpayer is blind If taxpayer can be claimed as a dependent by another For more information, refer to IRS Publication 17.

In Drake Software, the standard deduction is calculated from data entered on screen 1. Factors that determine the standard deduction are:

Filing Status Age Dependent of another Blind In the case of dependent of another, Drake Software uses income information to determine the appropriate standard deduction. NOTE: Drake Software optimizes between the standard and itemized deductions; however, the preparer has the ability to force either one.

New for 2016

For 2016 the Standard Deduction for filing status Head of Household increased from $9,250 to $9,300. Filing Statuses of Single or Married filing separately ($6,300) and Married filing jointly or Qualified widow(er) ($12,600) remain unchanged for 2016.

Standard Deduction Reduction

If a person can be claimed as the dependent of another, the standard deduction may be reduced. In 2016, the standard deduction for a taxpayer who can be claimed on another taxpayer's return is: Earned income (wages, salaries, tips, etc.) plus $350 But not less than $1,050 And not more than the standard deduction for the single filing status ($6,300)

Kinds of Exemptions: Personal Exemptions

If a taxpayer does not qualify as the dependent of another, they are allowed to claim a personal exemption on their individual tax return. If married filing jointly and no one is allowed to claim either spouse as a dependent, the couple can claim two personal exemptions on their joint tax return. If one spouse dies during the year, exemptions are allowed for both spouses. However, if the surviving spouse remarries, then a joint return can be filed with the new spouse and the deceased spouse files MFS. If the couple files MFS, the taxpayer is allowed an exemption for the spouse, if the spouse had no gross income, is not filing a return, and was not the dependent of another. This applies even if the spouse is a nonresident alien. Each personal exemption reduces the income that is subject to tax by the exemption amount of $4,050.

Dependent Filing Requirements

If someone else claims a taxpayer as a dependent, that taxpayer may still be required to file his or her own tax return. Whether or not the dependent must file a return depends on several factors, including: The amount of the dependent's unearned, earned, or gross income The marital status of the dependent Any special taxes that may be owed by the dependent A single person under 65 years old that is a qualifying dependent is not allowed to claim a personal exemption, even if no one claims the dependency exemption. A return must be filed if any of the following apply: Your unearned income was more than $1,050 Your earned income was more than $6,300 Your gross income was more than the larger of: $1,000, or Your earned income (up to $5,950) plus $350

Divorced or Separated Spouse

If the taxpayer received a final decree of divorce or separate maintenance by the end of the year, the taxpayer cannot take the former spouse's exemption. This rule applies even if the taxpayer provided all of the spouse's support. NOTE: A taxpayer's spouse is never considered a dependent of the taxpayer.

What is the Standard Deduction?

In addition to deducting exemptions from adjusted gross income, taxpayers are allowed to deduct the total of certain expenses, which are referred to as "itemized deductions". In lieu of itemized deductions the taxpayer can claim the standard deduction. As an alternative to itemized deductions, the IRC provides a standard deduction. The amount of the standard deduction is determined by filing status, dependency status, and if the taxpayer or spouse is blind, or over 65 years of age.

Kinds of Exemptions: Dependency Exemption

Remember: A dependent is a person other than the taxpayer or a spouse who qualifies the taxpayer to claim a dependency exemption. The term "dependent" is defined as a "qualifying child" or a "qualifying relative." To claim a dependency exemption for a qualifying child, all of the following tests must be met: Dependent taxpayer test Joint return test Citizenship test Relationship test Age test Residency test Support test

When the death of a spouse occurs and the taxpayer remarries that year, is it possible for the taxpayer to be claimed as an exemption on which return?

The joint return with the new spouse

Standard Deduction Increase

The standard deduction is increased for taxpayers and spouses who are: Age 65 or older, or Blind If born before January 2, 1952, or blind, multiply the number on Form 1040, line 39a (or Form 1040A, line 23a) by $1,250 ($1,550 if single or head of household) add this to the standard deduction. A taxpayer can take the higher standard deduction if his or her spouse is age 65 or older or blind and a joint return is filed.