Exemptions

March 13, 2024

8519 / When can a taxpayer claim a dependency exemption for a qualifying child or a qualifying relative?

<div class="Section1"> Editor’s Note: The personal exemption and dependency exemption were suspended for 2018-2025 by the 2017 tax reform legislation. However, the rules discussed below continue to be relevant in determining who qualifies as a dependent for various other tax provisions. In addition to the personal exemption, a taxpayer is entitled to an additional exemption (referred to as a dependency exemption) for each individual a taxpayer may claim as a dependent.<a href="#_ftn1" name="_ftnref1">1</a> Under certain circumstances, the taxpayer may claim the exemption even though the dependent files a return. The taxpayer must include the Social Security number of any dependent claimed on the tax return.<a href="#_ftn2" name="_ftnref2">2</a>There are two categories of dependents: 1) a “qualifying child” and 2) a “qualifying relative.”<a href="#_ftn3" name="_ftnref3">3</a> Qualifying child. The term “qualifying child” means an individual who: <blockquote>(1) is the taxpayer’s “child” (see below) or a descendant of such a child, or the taxpayer’s brother, sister, stepbrother, stepsister or a descendant of any such relative; (2) has the same principal place of abode as the taxpayer for more than one-half of the taxable year; (3) is younger than the taxpayer claiming the exemption and (i) has not turned age 19 as of the close of the calendar year in which the taxpayer’s taxable year begins, or (ii) is a student who has not turned age 24 as of the close of such calendar year; (4) has not provided over one-half of his or her own support for the calendar year in which the claiming taxpayer’s taxable year begins; and (5) who has not filed a joint tax return (other than to claim a refund) for the taxable year.<a href="#_ftn4" name="_ftnref4">4</a></blockquote> A “child” (including an adopted child) is an individual who is: (1) a son, daughter, stepson, or stepdaughter of the taxpayer; or (2) an “eligible foster child” of the taxpayer.<a href="#_ftn5" name="_ftnref5">5</a> An “eligible foster child” means an individual who is placed with the taxpayer by an authorized placement agency or by judgment decree, or other order of any court of competent jurisdiction.<a href="#_ftn6" name="_ftnref6">6</a> Qualifying relative. The term “qualifying relative” means an individual: <blockquote>(1) who is the taxpayer’s: (i) child (who is not otherwise a “qualifying child”) or a descendant of a child; (ii) brother, sister, stepbrother, or stepsister; (iii) father or mother or an ancestor of either, or stepfather or stepmother; (iv) son or daughter of a brother or sister of the taxpayer; (v) brother or sister of the father or mother of the taxpayer; (vi) son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law; or (vii) an individual (other than a spouse) who, for the taxpayer’s taxable year, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household. (2) whose gross income for the calendar year in which the taxable year begins is less than the exemption amount; (3) for whom the taxpayer provides over one-half of the individual’s support for the calendar year in which the taxable year begins; and (4) who is not a qualifying child of the taxpayer or of any other taxpayer for any taxable year beginning in the calendar year in which the taxable year begins.<a href="#_ftn7" name="_ftnref7">7</a></blockquote> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC §§ 151, 152. <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 151(e). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 152(a). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 152(c). <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 152(f). <a href="#_ftnref6" name="_ftn6">6</a>. IRC § 152(f)(3). <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 152(d). </div>

March 13, 2024

8516 / What is the personal exemption?

<div class="Section1">Editor’s Note: The 2017 tax reform legislation suspended the personal exemption for tax years beginning after December 31, 2017 and before December 31, 2025. Qualified disability trusts will continue to be permitted a personal exemption amount equal to $4,300 for 2020-2021, $4,400 for 2022, $4,700 in 2023, $5,000 in 2024 and $5,100 in 2025 (the amount is indexed for inflation).<a href="#_ftn1" name="_ftnref1">1</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a more detailed explanation of how the suspension of the personal exemption impacts IRS Form W-4 and employer tax withholding obligations. For tax years beginning before 2018 (and after 2025), the personal exemption is essentially a fixed tax deduction adjusted for inflation each year. For tax year 2018-2025, the personal exemption is suspended under the 2017 tax reform legislation. With an exception discussed below, regardless of filing status, each individual taxpayer who files a return was entitled to claim a personal exemption prior to this suspension. <hr> Planning Point: When the personal exemption was in effect, it was used to help employers determine correct tax withholding for employees. In the wake of tax reform, IRS released a draft Form W-4 designed to reflect the new changes to the tax code, including the elimination of the personal exemption. Late in 2019, the IRS released a simplified, final version of the new Form W-4. The new Form W-4 uses a multi-step process to calculate withholding. Form W-4 now asks for information regarding: (1) the employee’s personal (identifying) information, (2) whether the employee has multiple jobs or a spouse who works, (3) information about any dependents, (4) optional other adjustments (such as extra withholding or to account for itemizing deductions). Beginning in 2020, new employees are required to complete the final Form W-4. Existing employees with an old Form W-4 on file are not required to complete the new form, but employers are permitted to ask them to complete the new Form W-4.<a href="#_ftn2" name="_ftnref2">2</a> <hr> Married couples filing joint returns were entitled to claim two personal exemptions (one for each spouse). In addition to a personal exemption, an additional exemption in the same amount (sometimes referred to as a “dependency exemption”) was available for each individual a taxpayer may claim as a dependent. There are several special rules that apply to claiming exemptions. A married spouse filing a separate return could claim an exemption for the spouse provided the other spouse had no gross income and was not claimed as a dependent by another taxpayer.<a href="#_ftn3" name="_ftnref3">3</a> A child or other dependent (such as a parent) who filed his or her own return could not claim a personal exemption.<a href="#_ftn4" name="_ftnref4">4</a> Generally, the exemption was not allowed unless the Social Security number of the individual for whom the personal or dependency exemption was being claimed was provided.<a href="#_ftn5" name="_ftnref5">5</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 642(b)(2)(C)(iii). <a href="#_ftnref2" name="_ftn2">2</a>.   The new Form W-4 is available at: https://www.irs.gov/pub/irs-pdf/fw4.pdf. <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 151. <a href="#_ftnref4" name="_ftn4">4</a>.   IRC § 151(d)(2). <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 151(e). </div></div>

March 13, 2024

8518 / Are personal and dependency exemptions for high-income taxpayers subject to being phased out?

<div class="Section1"> Editor’s Note: the personal and dependency exemptions, along with the phaseout rules discussed below, were suspended for 2018-2025 under the 2017 tax reform legislation. Beginning in 2013, the personal and dependency exemptions of taxpayers with income over certain defined threshold levels were subject to being reduced and potentially phased out completely. The dollar amount of personal and dependency exemptions of taxpayers with adjusted gross income above the threshold levels (adjusted annually for inflation<a href="#_ftn1" name="_ftnref1">1</a>) was reduced by 2 percent for every $2,500 (or fraction thereof; $1,250 in the case of a married individual filing separately) by which income exceeded the threshold levels. Depending upon filing status, at certain adjusted gross income levels, the exemptions were phased out to zero. For 2017, the following chart illustrates the range of adjusted gross income in which the exemptions were gradually reduced until they are totally phased out: <table border="1" align="center"> <tbody> <tr> <td style="text-align: center;" width="216">Filing Status</td> <td style="text-align: center;" width="156">AGI Threshold At Which Phase Out Begins</td> <td style="text-align: center;" width="169">AGI Amount At Which Exemptions are Completely Phased Out</td> </tr> <tr> <td width="216">Married Joint and Surviving Spouse</td> <td style="text-align: center;" width="156">$313,800</td> <td style="text-align: center;" width="169">$436,300</td> </tr> <tr> <td width="216">Head of Household</td> <td style="text-align: center;" width="156">$287,650</td> <td style="text-align: center;" width="169">$410,150</td> </tr> <tr> <td width="216">Unmarried Individuals</td> <td style="text-align: center;" width="156">$261,500</td> <td style="text-align: center;" width="169">$384,000</td> </tr> <tr> <td width="216">Married Separate</td> <td style="text-align: center;" width="156">$156,900</td> <td style="text-align: center;" width="169">$218,150<a href="#_ftn2" name="_ftnref2">2</a></td> </tr> </tbody> </table>   </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC §§ 151(d)(3), 151(d)(4); Rev. Proc. 2015-53, 2015-44 IRB 615. <a href="#_ftnref2" name="_ftn2">2</a>. Rev. Proc. 2016-55. </div>

March 13, 2024

8520 / Who is entitled to the dependency exemption for qualifying children when the parents are divorced or have never been married?

<div class="Section1">Editor’s Note: The 2017 tax reform legislation suspended the availability of the personal exemption for 2018-2025. However, the child tax credit was expanded for those tax years (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="677">677</a>). The rules discussed below apply to tax years beginning before 2018 and after 2025. For purposes of determining if a parent is entitled to the dependency exemption for qualifying children, it makes no difference whether the parents were divorced or had never been married.<a href="#_ftn1" name="_ftnref1">1</a> As a general rule, the custodial parent is entitled to claim the dependency exemption. According to the Code, the parent having custody for the greater portion of the year is considered to be the “custodial parent.”<a href="#_ftn2" name="_ftnref2">2</a> However, if both parents have custody for equal amounts of time during the taxable year, the parent with the highest adjusted gross income is entitled to claim the exemption.<a href="#_ftn3" name="_ftnref3">3</a> On the other hand, the custodial parent may release the claim for exemption to allow the noncustodial parent to claim the exemption. In order to release the claim for exemption, the custodial spouse executes a Form 8332 that the noncustodial parent must attach to the tax return. As explained below, it is also possible for the custodial spouse to revoke the release of the exemption in order to claim it for himself or herself.   Post-2008 Rules for Release and Revocation of Release of Claim to Exemption For tax years beginning after July 2, 2008, there are prescribed procedures that allow a custodial parent to release his or her claim to a dependency exemption to the noncustodial parent, as well as to revoke the release of the claim to the exemption from the noncustodial parent (effectively returning the right to claim the dependency exemption to the custodial parent).   Releasing the Exemption to Noncustodial Spouse As mentioned above, the custodial spouse may release the claim to the exemption by executing a Form 8332 (Release/Revocation of Claim to Exemption for Child by Custodial Parent). Form 8332 provides the custodial parent with the option of releasing the right to claim the exemption for a single tax year or for multiple tax years. In the alternative, the custodial spouse may execute a conforming written document that includes the same information as it appears on a Form 8332. However, such written declaration must have been executed for the sole purpose of releasing the exemption to the noncustodial spouse for one or more tax years. Importantly, this means that attaching a court document such as a decree, or a divorce or separation agreement, would not be an acceptable written instrument even if it contains all of the required information.<a href="#_ftn4" name="_ftnref4">4</a> Also, in order to claim the exemption, the noncustodial parent must attach the Form 8332 or written declaration to his or her tax return.   Revoking the Release of the Exemption to Noncustodial Spouse According to the regulations, the custodial parent has the unilateral right to revoke the release of the exemption from the noncustodial spouse in order to claim it for himself or herself. To do so, the custodial parent is required to provide a noncustodial parent with written notice of the intent to revoke and make reasonable efforts to deliver such notice to the noncustodial parent. The revocation is effective no earlier than the tax year following the calendar year in which the custodial parent delivered or made reasonable efforts to deliver the notice to the noncustodial spouse.<a href="#_ftn5" name="_ftnref5">5</a> <blockquote>Example: Ashley and Asher are divorced parents with one child. Prior to tax year 2017, Ashley had executed a Form 8332 releasing the claim to the dependency exemption to Asher through tax year 2019. In February 2018, Ashley provides Asher written notice of her intent to revoke the release. Even though Asher received written notice of Ashley’s intent to revoke the release, it would not be effective earlier than tax year 2019. Thus, for tax year 2018, Asher remains entitled to claim the dependency exemption.</blockquote> Similar to the release, the revocation is made on Form 8332 or a separate conforming written document containing the same information contained on Form 8332. If a separate written document is used, it must be executed for the sole purpose of revoking the release. The revocation must also specify the year or years in which it is to be in effect. To reclaim the exemption, the custodial spouse must attach the Form 8832 or conforming document to his or her return.<a href="#_ftn6" name="_ftnref6">6</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   King v. Commissioner, 121 TC 245 (2003). See also Preamble, REG-149856-03, 72 Fed. Reg. 24192, 24194 (May 2, 2007). <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 152(e)(1)(B). <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 152(c)(4)(B). <a href="#_ftnref4" name="_ftn4">4</a>.   Treas. Reg. § 1.152-4(e). <a href="#_ftnref5" name="_ftn5">5</a>.   Treas. Reg. § 1.152-4(e)(3). <a href="#_ftnref6" name="_ftn6">6</a>.   Treas. Reg. § 1.152-4(e)(3). </div></div>

February 18, 2020

8517 / How did suspension of the personal exemption impact employer withholding requirements and Form W-4 for employees?

<div class="Section1"> Late in 2019, the IRS released a simplified, final version of the new Form W-4. The new Form W-4 uses a multi-step process to calculate withholding. Form W-4 now asks for information regarding: (1) the employee’s personal (identifying) information, (2) whether the employee has multiple jobs or a spouse who works, (3) information about any dependents, (4) optional other withholding adjustments (such as extra withholding or to account for itemizing deductions). Beginning in 2020, new employees are required to complete the final Form W-4. Existing employees with an old Form W-4 on file are not required to complete the new form, but employers are permitted to ask them to complete the new Form W-4.<a href="#_ftn1" name="_ftnref1">1</a> Under certain “change in status” events, however, employers are required to provide employees with a new form. The IRS and Treasury have proposed regulations on the new withholding requirements that apply given the suspension of the personal exemption for 2018-2025. The regulations confirm that employers are not required to provide existing employees with the redesigned Form W-4. For employees who had a Form W-4 on file prior to 2020, withholding can continue to be based on that form. Employees, however, now have the option of requesting that their employer withhold additional tax based on outside income. Employees can use the new IRS tax withholding estimator to help them accurately fill out Form W-4. If the employer has new employees who fail to properly complete the Form W-4, beginning in 2020, the employer can treat the employee as single, and calculate withholding based on the standard deduction and no adjustments.<a href="#_ftn2" name="_ftnref2">2</a> When an employee experiences a “change in status” that will impact the employee’s withholding for the current year, the employer must generally provide the employee with a revised Form W-4 within 10 days if the change reduces the number of withholding allowances permitted.<a href="#_ftn3" name="_ftnref3">3</a> Change in status can result from a change in wage levels, availability of withholding allowances (for example, an increase in the number of children qualifying for the child tax credit).<a href="#_ftn4" name="_ftnref4">4</a> If the total effect of the changes together with any other changes affecting the employee’s anticipated tax liability is not anticipated to result in an amount of tax to be deducted and withheld from the employee’s wages under IRC Section 3402 for the year that is less than the employee’s anticipated tax liability under Subtitle A, the employee is not required to furnish a new withholding allowance certificate.<a href="#_ftn5" name="_ftnref5">5</a> If, on any day during the calendar year, the employee experiences a change of status that increases the employee’s withholding allowance, the employee may furnish the employer with a new form claiming the withholding allowance to which the employee is entitled. For changes in status reasonably expected to impact the next calendar year, the employer must provide a new form by the later of (1) within 10 days after the change occurs, or (2) December 1 of the calendar year of the year in which the change occurs.<a href="#_ftn6" name="_ftnref6">6</a> (If the change of status, when considered with any other changes to the employee’s tax liability, is not anticipated to result in an amount of tax to be deducted and withheld from the employee’s wages for the employee’s next year that is less than the employee’s anticipated tax liability, the employee is not required to furnish a new withholding allowance certificate.) The regulations further clarify that the employer is not required to ascertain whether the withholding allowance claimed by the employee is greater than those to which the employee is actually entitled.<a href="#_ftn7" name="_ftnref7">7</a> Withholding allowances include various deductions (including the standard deduction and itemized deduction) and credits that the employee discloses, and are determined based on the employee’s anticipated filing status. Under the new withholding regulations, the IRS (or published guidance) may direct an employer to submit employees’ withholding certificates to the IRS.<a href="#_ftn8" name="_ftnref8">8</a> Further, the IRS may notify the employer that an employee is not entitled to claim more than a certain withholding allowance. This may happen, for example, if the IRS finds that the employee’s statements on the withholding certificate were materially false (or if the IRS lacks sufficient information to decide).<a href="#_ftn9" name="_ftnref9">9</a> If the employer receives a notice from the IRS with respect to a particular employee, the employer must give a copy of the notice to the employee within 10 business days. </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. The new Form W-4 is available at: https://www.irs.gov/pub/irs-pdf/fw4.pdf. <a href="#_ftnref2" name="_ftn2">2</a>. Prop. Treas. Reg. § 31.3402(f)(2)-1(a)(4). <a href="#_ftnref3" name="_ftn3">3</a>. Prop. Treas. Reg. § 31.3402(f)(2)-1(b)(1). <a href="#_ftnref4" name="_ftn4">4</a>. A listing of specific “change in status” events is provided in Prop. Treas. Reg. § 31.3402(f)(2)-1(b)(2). <a href="#_ftnref5" name="_ftn5">5</a>. Prop. Treas. Reg. §§ 31.3402(f)(2)-1(b)(3). <a href="#_ftnref6" name="_ftn6">6</a>. Prop. Treas. Reg. § 31.3402(f)(2)-1(e). <a href="#_ftnref7" name="_ftn7">7</a>. Prop. Treas. Reg. § 31.3402(f)(1)-1(a)(2). <a href="#_ftnref8" name="_ftn8">8</a>. Prop. Treas. Reg. § 31.3402(f)(1)-1(g)(1)(i)(A). <a href="#_ftnref9" name="_ftn9">9</a>. Prop. Treas. Reg. § 3311.3402(f)(1)-1(g)(2). </div>