Publication 17
Your Federal Income Tax

For Individuals

For use in preparing 2002 Returns

3. Personal Exemptions and Dependents

Important Changes

Exemption amount.   The amount you can deduct for each exemption has increased from $2,900 in 2001 to $3,000 in 2002.

Exemption phaseout.   You will lose all or part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which this phaseout begins depends on your filing status. For 2002, the phaseout begins at $103,000 for married persons filing separately, $137,300 for unmarried individuals, $171,650 for heads of household, and $206,000 for married persons filing jointly. See Phaseout of Exemptions, later.

Introduction

This chapter discusses exemptions. The following topics will be explained.

• Personal exemptions - You generally can take one for yourself and, if you are married, one for your spouse.
• Exemptions for dependents - You must meet five exemption tests for each exemption you claim. If you are entitled to claim an exemption for a dependent, that dependent cannot claim a personal exemption on his or her own tax return.
• Phaseout of exemptions - You get less of a deduction when your adjusted gross income goes above a certain amount.
• Social security number (SSN) requirement for dependents - You must list the social security number of any dependent for whom you claim an exemption.

Deduction.   Exemptions reduce your taxable income. Generally, you can deduct $3,000 for each exemption you claim in 2002. But, you may lose the benefit of part or all of your exemption if your adjusted gross income is above a certain amount. See Phaseout of Exemptions, later.

How you claim an exemption.   How you claim an exemption on your tax return depends on which form you file.

If you file Form 1040EZ, the exemption amount is combined with the standard deduction amount and entered on line 5.

If you file Form 1040A or Form 1040, follow the instructions for the form. The total number of exemptions you can claim is the total in the box on line 6d. Also complete line 26 (Form 1040A) or line 40 (Form 1040) by multiplying the total number of exemptions shown in the box on line 6d by $3,000.

If your adjusted gross income is more than $103,000, see Phaseout of Exemptions, later.

Useful Items

You may want to see:

Publication

• 501   Exemptions, Standard Deduction, and Filing Information

Form (and Instructions)

• 2120   Multiple Support Declaration
• 8332   Release of Claim to Exemption for Child of Divorced or Separated Parents

Exemptions

There are two types of exemptions: personal exemptions and exemptions for dependents. While these are both worth the same amount, different rules apply to each type.

Personal Exemptions

You are generally allowed one exemption for yourself and, if you are married, one exemption for your spouse. These are called personal exemptions.

Your Own Exemption

You can take one exemption for yourself unless you can be claimed as a dependent by another taxpayer.

Single persons.   If another taxpayer is entitled to claim you as a dependent, you cannot take an exemption for yourself. This is true even if the other taxpayer does not actually claim your exemption.

Married persons.   If you file a joint return, you can take your own exemption. If you file a separate return, you can take your own exemption only if another taxpayer is not entitled to claim you as a dependent.

Your Spouse's Exemption

Your spouse is never considered your dependent. You may be able to take one exemption for your spouse only because you are married.

Joint return.   On a joint return you can claim one exemption for yourself and one for your spouse.

Separate return.   If you file a separate return, you can claim the exemption for your spouse only if your spouse had no gross income and was not the dependent of another taxpayer. This is true even if the other taxpayer does not actually claim your spouse's exemption. This is also true if your spouse is a nonresident alien.

Death of spouse.   If your spouse died during the year, you can generally claim your spouse's exemption under the rules just explained under Joint return and Separate return.

If you remarried during the year, you cannot take an exemption for your deceased spouse.

If you are a surviving spouse without gross income and you remarry in the year your spouse died, you can be claimed as an exemption on both the final separate return of your deceased spouse and the separate return of your new spouse for that year. If you file a joint return with your new spouse, you can be claimed as an exemption only on that return.

Divorced or separated spouse.   If you obtained a final decree of divorce or separate maintenance by the end of the year, you cannot take your former spouse's exemption. This rule applies even if you provided all of your former spouse's support.

Exemptions for Dependents

You are allowed one exemption for each person you can claim as a dependent. To claim the exemption for a dependent, you must meet all five of the dependency tests, discussed later. You can claim an exemption for your dependent even if your dependent files a return. But that dependent cannot claim his or her own personal exemption if you are entitled to do so. However, see Joint Return Test, later in this chapter.

Kidnapped children.   You may be eligible to claim the exemption for a child, even if the child has been kidnapped. For more information, see Publication 501.

Child born alive.   If your child was born alive during the year, and the dependency tests are met, you can claim the exemption. This is true even if the child lived only for a moment. State or local law must treat the child as having been born alive. There must be proof of a live birth shown by an official document, such as a birth certificate.

Stillborn child.   You cannot claim an exemption for a stillborn child.

Death of dependent.   If your dependent died during the year and otherwise met the dependency tests, you can claim the exemption for your dependent.

Example.   Your dependent mother died on January 15. The five dependency tests are met. You can claim the exemption for her on your return.

Housekeepers, maids, or servants.   If these people work for you, you cannot claim exemptions for them.

Child tax credit.   You may be entitled to a child tax credit for each of your qualifying children for whom you can claim an exemption. For more information, see chapter 35.

Dependency Tests

The following five tests must be met for you to claim an exemption for a dependent.

1. Member of Household or Relationship Test.
2. Citizen or Resident Test.
3. Joint Return Test.
4. Gross Income Test.
5. Support Test.

Member of Household
or Relationship Test

To meet this test, a person must either:

1. Live with you for the entire year as a member of your household, or
2. Be related to you in one of the ways listed later under Relatives who do not have to live with you.

If at any time during the year the person was your spouse, that person cannot be your dependent. However, see Personal Exemptions, earlier.

Temporary absences.   A person lives with you as a member of your household even if either (or both) of you are temporarily absent due to special circumstances. Temporary absences due to special circumstances include absences because of illness, education, business, vacation, or military service.

If the person is placed in a nursing home for an indefinite period of time to receive constant medical care, the absence is considered temporary.

Death or birth.   A person who died during the year, but was a member of your household until death, will meet the member of household test. The same is true for a child who was born during the year and was a member of your household for the rest of the year. The test is also met if a child would have been a member except for any required hospital stay following birth.

Local law violated.   A person does not meet the member of household test if at any time during your tax year the relationship between you and that person violates local law.

Relatives who do not have to live with you.   A person related to you in any of the following ways does not have to live with you for the entire year as a member of your household to meet this test.

• Your child, grandchild, great grandchild, etc. (a legally adopted child is considered your child).
• Your stepchild.
• Your brother, sister, half brother, half sister, stepbrother, or stepsister.
• Your parent, grandparent, or other direct ancestor, but not foster parent.
• Your stepfather or stepmother.
• A brother or sister of your father or mother.
• A son or daughter of your brother or sister.
• Your father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law.

Any of these relationships that were established by marriage are not ended by death or divorce.

Adoption.   Even if your adoption of a child is not yet final, the child is considered to be your child if he or she was placed with you for legal adoption by an authorized placement agency. Also, the child must have been a member of your household. An authorized placement agency includes any person authorized by state law to place children for legal adoption.

If the child was not placed with you by an authorized placement agency, the child will meet this test only if he or she was a member of your household for your entire tax year.

Foster child.   A foster child must live with you as a member of your household for the entire year to qualify as your dependent. For this test, a foster child is one who is in your care that you care for as your own child. It does not matter how the child became a member of the household.

Cousin.   You can claim an exemption for your cousin only if he or she lives with you as a member of your household for the entire year. A cousin is a descendant of a brother or sister of your father or mother.

Joint return.   If you file a joint return, you do not need to show that a person is related to both you and your spouse. You also do not need to show that a person is related to the spouse who provides support.

For example, your spouse's uncle who receives more than half his support from you may be your dependent, even though he does not live with you. However, if you and your spouse file separate returns, your spouse's uncle can be your dependent only if he is a member of your household and lives with you for your entire tax year.

Citizen or Resident Test

To meet the citizen or resident test, a person must be a U.S. citizen or resident, or a resident of Canada or Mexico, for some part of the calendar year in which your tax year begins.

Children's place of residence.   Children usually are citizens or residents of the country of their parents.

If you were a U.S. citizen when your child was born, the child may be a U.S. citizen although the other parent was a nonresident alien and the child was born in a foreign country. If so, and the other dependency tests are met, you can take the exemption. It does not matter if the child lives abroad with the nonresident alien parent.

If you are a U.S. citizen who has legally adopted a child who is not a U.S. citizen or resident, and the other dependency tests are met, you can take the exemption if your home is the child's main home and the child is a member of your household for your entire tax year.

Foreign students' place of residence.   Foreign students brought to this country under a qualified international education exchange program and placed in American homes for a temporary period generally are not U.S. residents and do not meet the citizen or resident test. You cannot claim exemptions for them. However, if you provided a home for a foreign student, you may be able to take a charitable contribution deduction. See Expenses Paid for Student Living With You in chapter 26.

Joint Return Test

Even if the other dependency tests are met, you are generally not allowed an exemption for your dependent if he or she files a joint return.

Example.   You supported your daughter for the entire year while her husband was in the Armed Forces. The couple files a joint return. Even though all the other tests are met, you cannot take an exemption for your daughter.

Exception.   The joint return test does not apply if a joint return is filed by the dependent and his or her spouse merely as a claim for refund and no tax liability would exist for either spouse on separate returns.

Example.   Your son and his wife each had less than $3,000 of wages and no unearned income. Neither is required to file a tax return. Taxes were taken out of their pay, so they file a joint return to get a refund. You are allowed to take exemptions for your son and daughter-in-law if the other dependency tests are met, even though they can also claim their personal exemptions on their joint return.

Gross Income Test

Generally, you cannot take an exemption for a dependent if that person had gross income of $3,000 or more for 2002. This test does not apply if the person is your child and is either:

1. Under age 19 at the end of the year, or
2. A student under age 24 at the end of the year.

The exceptions for children under age 19 and students under age 24 are discussed in detail later.

If you file on a fiscal year basis, the gross income test applies to the calendar year in which your fiscal year begins.

Gross income defined.   All income in the form of money, property, and services that is not exempt from tax is gross income.

In a manufacturing, merchandising, or mining business, gross income is the total net sales minus the cost of goods sold, plus any miscellaneous income from the business.

Gross receipts from rental property are gross income. Do not deduct taxes, repairs, etc., to determine the gross income from rental property.

Gross income includes a partner's share of the gross, not a share of the net, partnership income.

Gross income also includes all unemployment compensation and certain scholarship and fellowship grants. Scholarships received by degree candidates that are used for tuition, fees, supplies, books, and equipment required for particular courses are not included in gross income. For more information, see chapter 13.

Tax-exempt income, such as certain social security payments, is not included in gross income.

Disabled dependents.   For this gross income test, gross income does not include income received by a permanently and totally disabled individual for services performed at a sheltered workshop. The availability of medical care must be the main reason the individual is at the workshop. Also, the income must come solely from activities at the workshop that are incident to this medical care. A sheltered workshop is a school operated by certain tax-exempt organizations, or by a state, a U.S. possession, a political subdivision of a state or possession, the United States, or the District of Columbia, that provides special instruction or training designed to alleviate the disability of the individual.

Child defined.   For purposes of the gross income test, your child is your son, stepson, daughter, stepdaughter, a legally adopted child, or a child who was placed with you by an authorized placement agency for your legal adoption. A foster child who was a member of your household for your entire tax year is also considered your child.

Child under age 19.   If your child is under 19 at the end of the year, the gross income test does not apply. Your child can have any amount of income and you can still claim an exemption if the other dependency tests, including the support test, are met.

Example.   Marie, 18, earned $4,000. Her father provided more than half her support. Because Marie is under 19, the gross income test does not apply. If the other dependency tests were met, Marie's father can claim an exemption for her.

Student under age 24.   The gross income test does not apply if your child is a student who is under age 24 at the end of the calendar year. The other dependency tests must still be met.

Student defined.   To qualify as a student, your child must be, during some part of each of 5 calendar months during the calendar year (not necessarily consecutive):

1. A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or
2. A student taking a full-time, on-farm training course given by a school described in (1) above or a state, county, or local government.

Full-time student defined.   A full-time student is a person who is enrolled for the number of hours or courses the school considers to be full-time attendance.

School defined.   The term school includes elementary schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. It does not include on-the-job training courses, correspondence schools, and night schools.

Example.   James, 22, attends college as a full-time student. During the summer, James earned $4,000. If the other dependency tests are met, his parents can take the exemption for James.

Vocational high school students.   People who work on co-op jobs in private industry as a part of the school's prescribed course of classroom and practical training are considered full-time students.

Night school.   Your child is not a full-time student while attending school only at night. However, full-time attendance at a school can include some attendance at night as part of a full-time course of study.

Support Test

Generally, you must provide more than half of a person's total support during the calendar year to meet the support test. However, there are special rules that apply in the following two situations.

1. Two or more persons provide support, but no one person provides more than half of a person's total support. See Multiple Support Agreement, later.
2. The person supported is the child of divorced or separated parents. See Support Test for Child of Divorced or Separated Parents, later.

You figure whether you have provided more than half of a person's total support by comparing the amount you contributed to that person's support with the entire amount of support that person received from all sources. This includes support the person provided from his or her own funds.

You may find Table 3-1

Worksheet for Determining Support

Table 3-1. Worksheet for Determining Support

support.

Person's own funds not used for support.   A person's own funds are not support unless they are actually spent for support.

Example.   Your mother received $2,400 in social security benefits and $300 in interest. She paid $2,000 for lodging and $400 for recreation.

Even though your mother received a total of $2,700, she spent only $2,400 for her own support. If you spent more than $2,400 for her support and no other support was received, you have provided more than half of her support.

Child's wages used for own support.   You cannot include in your contribution to your child's support any support that is paid for by the child with the child's own wages, even if you paid the wages.

Year support is provided.   The year you provide the support is the year you pay for it, even if you do so with borrowed money that you repay in a later year.

If you use a fiscal year to report your income, you must provide more than half of the dependent's support for the calendar year in which your fiscal year begins.

Armed Forces dependency allotments.   The part of the allotment contributed by the government and the part taken out of your military pay are both considered provided by you in figuring whether you provide more than half of the support. If your allotment is used to support persons other than those you name, you can take the exemptions for them if they otherwise qualify.

Example.   You are in the Armed Forces. You authorize an allotment for your widowed mother that she uses to support herself and your sister. If the allotment provides more than half of their support, you can take an exemption for each of them, if they otherwise qualify, even though you authorize the allotment only for your mother.

Tax-exempt military quarters allowances.   These allowances are treated the same way as dependency allotments in figuring support. The allotment of pay and the tax-exempt basic allowance for quarters are both considered as provided by you for support.

Tax-exempt income.   In figuring a person's total support, include tax-exempt income, savings, and borrowed amounts used to support that person. Tax-exempt income includes certain social security benefits, welfare benefits, nontaxable life insurance proceeds, Armed Forces family allotments, nontaxable pensions, and tax-exempt interest.

Example 1.   You provide $4,000 toward your mother's support during the year. She has earned income of $600, nontaxable social security benefit payments of $4,800, and tax-exempt interest of $200. She uses all these for her support. You cannot claim an exemption for your mother because the $4,000 you provide is not more than half of her total support of $9,600.

Example 2.   Your daughter takes out a student loan of $2,500 and uses it to pay her college tuition. She is personally responsible for the loan. You provide $2,000 toward her total support. You cannot claim an exemption for your daughter because you provide less than half of her support.

Social security benefit payments.   If a husband and wife each receive payments that are paid by one check made out to both of them, half of the total paid is considered to be for the support of each spouse, unless they can show otherwise.

If a child receives social security benefits and uses them toward his or her own support, the payments are considered as provided by the child.

Support provided by the state (food stamps, housing, etc.).   Benefits provided by the state to a needy person generally are considered to be used for support. However, payments based on the needs of the recipient will not be considered as used entirely for that person's support if it is shown that part of the payments were not used for that purpose.

Foster care payments and expenses.   Payments you receive for the support of a foster child from a child placement agency are considered support provided by the agency. Similarly, payments you receive for the support of a foster child from a state or county are considered support provided by the state or county.

If you are not in the trade or business of providing foster care to a child and your unreimbursed out-of-pocket expenses in caring for a foster child were mainly to benefit an organization qualified to receive deductible charitable contributions, the expenses are deductible as charitable contributions, but are not considered support you provided. For more information about the deduction for charitable contributions, see Publication 526. If your unreimbursed expenses are not deductible as charitable contributions, they are considered support you provided.

If you are in the trade or business of providing foster care, your unreimbursed expenses are not considered support provided by you.

Home for the aged.   If you make a lump-sum advance payment to a home for the aged to take care of your relative for life and the payment is based on that person's life expectancy, the amount of support you provide each year is the lump-sum payment divided by the relative's life expectancy. The amount of support you provide also includes any other amounts that you provided during the year.

Figure 3-A. Can You Claim an Exemption for a Dependent?

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