In our last tax-reduction strategy discussion, we compared Standard with Itemized Deductions. Now we will look at Personal Exemptions.
What Are Legal Personal Exemptions?
Individuals are entitled to claim a personal exemption for themselves and any dependents they support.
The personal exemption acts just like a tax deduction - it reduces your taxable income, so you end up paying taxes on less income. The personal exemption amount is indexed annually for inflation. For tax year 2014, the personal exemption amount is $3,950.
Dependency Exemptions - 5 Tests
If you want to use dependency exemptions, you need to pass the following 5 tests:
In our next tax-reduction strategy discussion, we will focus on Tax Credits.
What Are Legal Personal Exemptions?
Individuals are entitled to claim a personal exemption for themselves and any dependents they support.
The personal exemption acts just like a tax deduction - it reduces your taxable income, so you end up paying taxes on less income. The personal exemption amount is indexed annually for inflation. For tax year 2014, the personal exemption amount is $3,950.
Dependency Exemptions - 5 Tests
If you want to use dependency exemptions, you need to pass the following 5 tests:
- Support test - over 1/2 support must be furnished
- Relationship test - almost any blood relative qualifies except first cousins and aunts- or uncles-in-law
- Gross income test: dependent’s gross income must be less than the exemption amount
- Joint-return test
- Citizenship/Residency test
In our next tax-reduction strategy discussion, we will focus on Tax Credits.
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