Mar 29 2014, 7:33pm CDT | by Forbes
After you’ve figured your deductions and adjustments to income, you have one last stab at reducing your taxable income: personal exemptions. Personal exemptions further decrease your taxable income before you determine your tax. For 2013, the personal exemption amount is $3,900 (it’s $3,950 for 2014).
You are generally allowed one exemption for yourself unless you can be claimed as a dependent by another taxpayer. If you can be claimed as a dependent by another taxpayer, you cannot claim the personal exemption for yourself even if the other taxpayer doesn’t actually claim you on their return.
Your spouse is never considered your dependent. You may, however, be able to claim a personal exemption for your spouse depending on your circumstances:
You can claim one personal exemption for each of your dependents. This is true even if your dependent files his or her own return. However, as above, if you can claim an exemption for your dependent, the dependent cannot claim his or her own personal exemption on his or her own tax return. This is true even if you do not claim the dependent’s exemption on your return (this is where a lot of students get into trouble).
If you don’t include your dependent’s Social Security number on the return or if you use the wrong number, the personal exemption may be disallowed. Nowadays, almost all babies born in hospitals are assigned Social Security numbers pretty quickly. If you don’t have one for your dependent born in 2013, you’ll want to apply for one (use form SS-5, downloads as a pdf) and likely file for an extension for your taxes.
You figure your personal exemption amount on line 42 of your form 1040. That amount, however, is based on the number of exemptions you claim on the front of your return.
Personal exemptions do have limits and those limits are based on your income. You lose part of the benefit of your personal exemptions once your adjusted gross income reaches a certain amount – this is referred to as the personal exemption phaseout, or PEP. For 2013, those phaseouts begin at $250,000 for individual taxpayers; $275,000 for taxpayers filing as head of household; $300,000 for married taxpayers filing jointly or qualifying widow(er); and $150,000 for married taxpayers filing separate. PEP reduces the total personal exemption by 2% by those taxpayers over those amounts. This means that taxpayers completely lose the benefit of personal exemptions at $372,500 for individual taxpayers and $422,500 for married taxpayers filing jointly.
For more in the series, see:
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Source: Forbes Business
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