A personal deduction is an amount that reduces your taxable income for the year and is based on a combination of factors. The personal deduction is often called the personal exemption amount on the individual income tax forms. Taxable income is the amount that is used to calculate the tax bracket that you fall into and the taxation rate that you need to pay. There are three types of personal deduction amounts available: individual, spousal and dependent.
Every person who is filing a tax return is eligible to claim the individual deduction amount. It is not related to your level of income and is a federal amount. The amounts are reviewed annually and are often updated to reflect increased cost of living.
The head of household can claim the spousal deduction, so long as the spouse does not claim the personal deduction on their own income tax return. There are detailed guidelines for this type of claim that should be investigated if you are planning on using it. The general rules is that any taxpayer who is recorded as a dependent cannot use their personal exemptions to reduce their own taxable income.
The definition of dependent is quite specific for personal deduction purposes. A dependent is either a qualifying child or a qualifying relative. People who are not United States citizens cannot be claimed as dependants unless they live in the United States and are reliant on the taxpayer for support.
A qualifying child must live at the same principle address as the person claiming the deduction for at least half the year. The definition of children includes all adopted, foster and stepchildren. The child must not have had sufficient income to pay for more than half of their living costs during the year. All children must be either younger than 19 or students under 24 years of age. Permanently disabled children are eligible as dependants under a different section of the income tax act.
A child cannot be claimed as a dependent on multiple tax returns. In the case of a separated or divorced family, the parent the child lives with the longest is granted the deduction. There are several calculations involved in determining which parent is granted the deduction if this is unclear. Factors used include determining which parent has the highest gross income or the details as provided in the divorce and support order.
Qualifying relatives cannot be a child of the taxpayer. The total income for the relative must be less than the personal deduction amount and the taxpayer must provide evidence of supporting more than half the living costs for that person. Examples of qualifying residents include parents, grandparent, nieces, nephews and in-laws.