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8-13 ___________________________________________________________________ CHAPTER 8 TAXATION OF INDIVIDUALS _______________________________________________________________________________ DISCUSSION QUESTIONS 1. What is the difference between a personal exemption and a dependency exemption? Are all taxpayers allowed a personal exemption? Both types of exemptions are worth the same amount in terms of a deduction. Personal exemptions are allowed to the taxpayer(s) filing the return (this can never be greater than two), while dependency exemptions are allowed for those individuals who qualify as a taxpayer's dependent. Not all taxpayers are entitled to a personal exemption. A taxpayer that is claimed as a dependent of another is not allowed a personal exemption deduction. The effect of this provision is to allow only 1 exemption deduction per individual. Note: If there is total tax compliance, then the total number of exemptions taken equals the total U.S. population. However, two factors, administrative convenience and tax evasion, prevent this from happening. For purposes of administrative convenience, the government does not require every taxpayer to file a return. Other taxpayers who are required to file a return choose not to file -- tax evasion. 2. What are the five tests which must be met to claim a dependency exemption? Briefly explain each test. The 5 dependency tests are: 1. Gross Income Test - the gross income of a dependent cannot exceed the amount of the exemption deduction. This test is waived for a child of the taxpayer under the age of 19 and for full-time students under the age of 24. 2. Support Test - the taxpayer seeking the exemption must pay more than 1/2 of the amount spent on the dependents support. Only amounts spent on support are considered in this test, not the amounts the dependent may have earned but did not spend on support. 3. Relationship or Member of Household Test - the dependent must be either a relative or a member of the taxpayer's household for the entire year. A relative is defined as lineal descendants (ancestor, daughter) and blood relatives (aunt, nephew). 4. Citizen or Residency Test - a dependent must be either a U.S. citizen or a resident of the U.S., Canada, or Mexico for at least part of the year. 5. Joint Return Test - a dependent cannot file a joint return, unless the only purpose for filing the return is to obtain a refund of taxes paid-in. That is, they are not required to file under the filing requirements.
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8-14 Chapter 8: Taxation of Individuals 3. Which parent is entitled to claim the dependency exemption for a child when the parents are divorced? Can the other parent ever claim the dependency exemption? The custodial parent is entitled to the deduction, regardless of the level of support the non-custodial parent may provide. There are 2 possible ways that the non- custodial parent can claim the exemption deduction. First, the divorce decree may specify that the non-custodial parent is entitled to the dependency exemption(s).
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