People cringe when it comes to understanding their tax forms. The hardest part is the terminology. If we could just figure out what they are trying to say without having to consult Webster’s dictionary for every third word, things wouldn’t be so bad. Well, there will be at least two words you won’t have to look up this year: dependent and exemption.
What is a dependent? One example of a dependent is a person that resides in your household. This person can be a child, adopted child, or other member of the family that lives under your roof. When classified as a dependent, this person can’t be claimed by anyone else on their tax returns.
Another example of a dependent is a person whose care you provide for. This could be an elderly parent or relative that relies on you for medical expenses and care. They could be under your roof or housed in another facility like a nursing home, but you foot the bill.
A dependent child may have a job that does or doesn’t require them to file a tax return. If your teenage son or daughter is employed during the summer, they probably won’t create enough income to file a tax return. You will claim them on your tax return as a dependent. Even if they do file a return, they are allowed to claim an exemption for themselves when you claim them as well, since you are still paying the majority of the expenses for their care and housing.
An exemption is any amount of money you are allowed to subtract from your taxable income for the people under your care. Exemptions can be claimed for yourself, your spouse, and each of your children. Elderly parents or grandparents that you care for will net you more exemptions on your tax form.
Exemptions lower the amount of taxable income that has to be reported to the IRS. The amount of taxes required to be paid depends on your final income. Each exemption that you claim can work in your favor. Dependents can be claimed as exemptions on your tax return. A filer can claim $3,300 for each of their dependents on their tax return as an exemption.
Personal exemptions are claimed on your W-4 withholding forms from your employer. Personal exemptions claimed for state and federal tax purposes determine the amount of tax dollars taken out of each paycheck. Claiming too many exemptions puts money in your pocket throughout the year but could result in a tax bill later on. Claiming too few exemptions gives Uncle Sam free use of your money for a year before they have to return it to you.
These two terms are separate but work together. A qualified dependent can be claimed as an exemption to lower your tax bill. Dependents also make filers eligible for tax credits, which are even better than exemptions.