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such cases.
Parties who are nonresident aliens or dual status aliens during the year are
not permitted to use the standard deduction for the year. A party who is both
a resident alien for part of the year and a nonresident alien for the remainder
is considered to be a dual status alien.
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Chapter 8
Exemptions
In calculating taxable income, a taxpayer is allowed to reduce adjusted
gross income by not only the larger of the standard deduction or allowable
itemized deductions, but also by any available allowance for exemptions as
well. The amount of the exemption deduction, which is stated on the line
that is designated on Form 1040 for the total exemption deduction to be
taken, is adjusted annually, as provided for in I.R.C. Section 151(d)(4).
The exemptions that are available are personal exemptions and exemptions
for dependents.
PERSONAL EXEMPTIONS
Each taxpayer is allowed to take a personal exemption for him- or herself,
unless he or she can be claimed as a dependent by some other taxpayer.
Married taxpayers who file joint returns are allowed to take a personal
exemption for each spouse. Even if a married taxpayer files a separate return,
the party can still take a personal exemption for his or her spouse, as long as
the spouse had no gross income and could not be claimed as a dependent by
some other taxpayer, regardless of whether that party actually claimed the
spouse. The fact that a party s spouse is a nonresident alien will not affect
the right to take a personal exemption for the spouse, as long as the taxpayer
is otherwise qualified to do so. If a spouse dies, the surviving spouse may
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174 Tax Power for Individuals
still claim a personal exemption for the deceased spouse for the year of the
spouse s death, provided that the surviving spouse did not remarry during
that year. No personal exemption may be taken for a spouse if the couple is
divorced or legally separated as of the last day of the year, even if the party
seeking the exemption had fully supported the former spouse for the entire
year in question.
EXEMPTIONS FOR DEPENDENTS
In addition to the personal exemption available to taxpayers and their
spouses, exemptions may also be taken for dependents. However, they must
meet the five dependency tests to qualify the taxpayer to take an exemption
for them.
The Relationship T est
In order for a taxpayer to be entitled to take an exemption for someone as his
or her dependent, that party must have either lived with him or her as a
member of the party s household for the entire tax year or must be related to
the taxpayer to the degree specified in I.R.C. Section 152. Those who are
considered to be relatives of a taxpayer under the provisions of Section 152
are children, stepchildren, grandchildren, and great-grandchildren; brothers
and sisters, including half brothers and sisters and stepbrothers and stepsis-
ters; parents, stepparents, grandparents, and great-grandparents; aunts and
uncles; nieces and nephews; parents and siblings of a spouse; and, sons-in-law
and daughters-in-law. Any of the relationships created by marriage are not
terminated by divorce or by the death of the taxpayer s blood relative.
The Citizenship or Residency T est
A person for whom a taxpayer wishes to take an exemption as a dependent
must be a citizen or resident of the United States or a resident of Canada or
Mexico. As long as the party meets this requirement for some part of the
calendar year in which the taxpayer s tax year begins, the requirement of the
test is considered met for the year.
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Exemptions 1 75
The Joint Retur n Test
Generally, if a taxpayer is otherwise entitled to take an exemption for a
dependent, but the dependent is married and files a joint return, the
taxpayer will not be allowed to take the exemption. The lone exception to
this provision is the situation in which a party s married dependent files a
joint return with his or her spouse in order to claim a refund of taxes with-
held from earnings, but the couple that filed the joint return had such low
earnings that no taxes would have been due for either of them if they had
filed separate returns.
EXAMPLE: Bernard, while on a job in Hong Kong, contracted bird flu in late
May and was placed in quarantine. His wife, Cassandra, a student
at a local college, moved out of the couple s apartment and moved
in with her parents while Bernard recovered. Bernard s recovery
took several months, during which time Cassandra s parents fully
supported her. Bernard and Cassandra filed a joint return reporting
the $34,000 income that he earned before he got sick. Even
though Cassandra s parents provided her with most of her support
for the year, they will not be able to take an exemption for her
since she filed a joint return with her husband, who earned suffi-
cient income to have a tax liability.
EXAMPLE: George and Laura, a married couple, were students during the
year. They lived with George s parents who supported them, since
the only income that George and Laura had was about $2,000
each from summer jobs. A small amount of income tax was held
out of each of their salaries, so they filed a joint return to claim a
refund for the amounts withheld. If all of the other tests are met,
George s parents will be permitted to claim both George and
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