If you haven’t found a tax preparer to assist you in your tax filing adventures, you may be interested to know more about one of the beginning steps in determining what you owe, or what the federal government owes you. This time we’re going to go over what exactly a tax exemption is, and which ones you’re eligible to claim on your return.
Tax exemptions are a set amount of money you’re allowed to subtract from your Adjusted Gross Income (AGI) to reduce your overall taxable income. These exemptions are given to qualifying dependents as well as yourself. If you happen to have a family, your exemption amount is going to be far greater than the exemption amounts granted to single individuals. In 2015, each qualifying exemption is going to grant you $4,000 per individual. For example, if you’re a family of five, married filing jointly, your total tax exemptions on your income tax return will be for five people. This number multiplied by $4,000 each is going to bring you to a $20,000 tax exemption amount.
Exemptions are partially related to allowances, which is the number you’ll claim when filling out your W-2 with a new employer. The number of allowances you take when filling out your W-2 should reflect the amount of income tax you need withheld from your checks to cover what you are going to owe the IRS come tax season. The ultimate goal here is to come to a zero ($0) balance when you file your taxes. In a perfect world, you’ll pay taxes quarterly, or have the exact amount withheld from your paychecks so that you neither owe nor are due a refund. If you expect to get a refund, while sometimes this can be fun and some people even hope for it, remember that a refund is just the IRS returning your money to you. That’s money you’ve essentially lent them for free. Many people utilize the services of an accountant to advise them on things like W-4s and other tax investments throughout the year.
How many exemptions to claim if you’re married.
The primary exemption you’ll claim is for yourself. That’ll be (1) on your return. But if you’re married, you have a few options. Married filing jointly will grant you two (2), one exemption for you, and one for your spouse. If you’re married but plan on filing separately, you are only allowed to claim yourself. The reasoning for this is that you are not allowed to claim someone who will be claimed on another person’s return. Filing separately means your spouse is filing their own, so they’ll be claiming one (1) on their own return! Once you have that squared away, you can move on to your qualifying dependents.
What constitutes as a qualifying dependent?
For IRS purposes, a qualifying dependent can be one of a few situations. Biological children, adopted, and foster children are all considered qualifying dependents, as well as siblings, step-children, and grandchildren too. The rules for these types of qualifying children is that they must live with you more than half the year, be under 19 years of age by December 31st, and if they happen to be a student, they must be under 24.The last big piece to this is that the qualifying child cannot provide you with more than half of their living expenses. For example, if your qualifying child is 18, is paying you rent, half of the utilities, and is supplying all of their own food, clothing and other needs, you probably can’t claim them on your return.
Qualifying relatives are also exempt, but they too come with their own set of rules. Never mind the word “relatives”, as they don’t literally have to be related to you. A lot of the same rules apply as with qualifying children; they have to live with you a majority of the year, they must be a citizen, cannot make over $4,000 in income for the year, and you must provide them with over half of their living expenses for the year. The rule that they may not be claimed on anyone else’s return stands the same, only one exemption per person at tax time. To ensure you’re allowed to claim someone as a dependent, find a tax professional for income tax exemptions to get the most from your return.
What about Head of Household?
This question spans tax topics from A to Z. When it comes to exemptions, it applies on two counts. You cannot be married to file as head of household. That clears up the question of whether or not you claim your spouse, you just can’t! But in order to use this filing status you must claim dependents, and those dependents can contribute by providing to the household expenses. Basically this means you have to be the majority provider for your household (that means over 50% of all expenses are footed by yourself), and you can’t be married. You can be separated or even engaged, but you absolutely must claim either a qualifying child or qualifying relative on your return. Either way, the guidelines for filing as head of household are pretty strict, so to avoid an audit at a later date and make sure to comply entirely.
There are a lot of questions when it comes to filing out your tax form 1040. Multiple boxes, deduction options, credits and taxes are listed in length to help calculate your income tax return. Let us help you keep things straight and make sure you’re as well informed as possible to maximize your tax savings. Please click on the link below to view our profile and reach out to us directly. We’re looking forward to helping you!
M-E Accounting & Tax Services, Inc.