November 22nd, 2009 |  Print This Post |  Email This Post

Personal Exemptions

A personal exemption deduction is allowed for a taxpayer, a spouse and any dependents such as children and other relatives. The amount for 2009 is $3,650 for each exemption, but this amount is reduced if the taxpayer’s Adjusted Gross Income (AGI) exceeds a certain amount.

In calculating the Alternative Minimum Tax, however, no deduction is allowed for personal exemptions. Thus, AMT taxable income will be higher than Regular Tax taxable income by the amount of exemptions claimed. For example, a married taxpayer with two children would be entitled to a Regular Tax deduction of $14,600 for these exemptions. If Regular Tax income for this family were $100,000, then AMT income would be $114,600.

There really isn’t anything that can be done to change the AMT effect of personal exemptions for the taxpayer and spouse – the tax law simply takes them away for purposes of the AMT. However, if there are dependents, a few situations exist where there may be planning opportunities to save taxes within the family unit.

One example is if the dependent is a daughter, a son, or other relative with income of her own but yet the taxpayer is still providing substantial support. In figuring out who provides more than half of the dependent’s support – the basic eligibility test for claiming the exemption – one looks to whether income of the dependent is or is not spent on her own support. So, for example, if the daughter is attending college and also at the same time working, any of her earnings that are spent on her support count towards her eligibility to take the personal exemption. Even though the student’s tax bracket most likely would be lower than the parent-taxpayer’s, any tax benefit certainly is better than the zero tax benefit the parent is getting because of the AMT.

Another example is in the case of divorced or separated parents, who may or may not have executed a multiple support agreement. The tax rules essentially allow the parties to agree which of them will take the child’s personal exemption. The planning here is simple, assuming lines of communication between the parties remain open – if one is in the Alternative Minimum Tax but the other is not, why not arrange to give the one not in the AMT the exemption deduction?