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A dependency exemption is a tax deduction available to people with qualified dependents. These commonly include minor children, but can also involve other members of a household who are dependent on the taxpayer for support. For example, a married couple providing housing, food, and assistance for an aging parent could claim that person as a dependent. Tax laws surrounding dependency exemptions can get complicated, and it is important to claim them correctly.
Taxpayers can claim themselves as dependents, taking a standard deduction, and can take additional claims for each qualified dependent in the household. Someone still qualifies as a dependent, even if working or receiving government benefits, as long as more than half of that person’s financial support comes from the taxpayer. This can include students living at home, elderly or disabled family members, or members of a household who are not related by blood, but rely on the taxpayer for support.
Each dependency exemption qualifies the taxpayer to deduct a set sum from his or her taxable income for the year. This amount is periodically adjusted to account for inflation, and is usually listed in tax documentation. Claiming the dependency exemption also allows people to claim head of household status and may qualify them to take an Earned Income Tax Credit, depending on the tax code. Substantial tax savings may be available through correctly declared dependency exemptions.
There are some considerations to be aware of when claiming a dependency exemption for taxes. People who are separated cannot claim the same dependent, even if they both provide support. This most commonly arises with the children of divorced parents. In this case, dependency is based on where the child has residency, and who provides the most support. If duties are split equally, parents can negotiate with each other, or discuss the situation with a tax attorney to get some specific advice.
Adopted and foster children are also treated specially for the purpose of dependency exemptions. The government may provide financial assistance to families who take in children. The family spending must exceed the amount provided by the government in order to claim those children as dependents. Thus, if the government provides $3,000 United States Dollars (USD) annually to help a family support a foster child, the family needs to spent $3,001 USD to claim a dependency exemption. False claims can result in penalties, including having to refile a tax declaration with the correct information and paying higher taxes.
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