How to Claim an Exemption on Federal Taxes

To claim an exemption on federal taxes, certain criteria must be met.

An exemption on federal taxes is an amount of income that is shielded from federal income tax withholding. An exemption can be claimed for an individual, spouse of that individual (if the couple files jointly) and any dependents of an individual. This type of tax deduction is intended to cover a minimal amount that a person needs to survive (food, shelter and clothing). For the 2009 tax year, each personal exemption amount was $3,650.

Things You'll Need

• W2 Tax Form
• 1040 Tax Form

Instructions

1. Determine how many personal exemptions you may be eligible for. If you and your spouse file jointly, you can claim an exemption for both yourself and for your spouse. You can also claim any children under the age of 19, or a full-time student under the age of 24 who you support. Look on Form 1040 at Line 6d ("Total number of exemptions claimed"). Multiply this number by $3,650, and put the total on Line 42.

2. Consult with your military payroll personnel to determine if any of your time served in the past year qualifies as combat pay. Any income earned from the U.S. military during those months is exempt from all federal taxes. In addition, if you sustained injuries that required hospitalization because of combat zone fighting, military income earned during hospitalization is also exempt from federal taxes. However, there is a two-year limitation on exemption of income during hospitalization. Military pay attributable to your active service in the combat zone that is excluded from gross income will not appear on your Form W-2 in the box marked "Wages, tips, other compensation." However, your military pay for this type of service is subject to Social Security and Medicare taxes, and will appear on your W-2 form in the boxes marked "Social Security wages" and "Medicare wages and tips." Include your stated income from your W2 form on Line 7 of your 1040, and file a copy of your W2 with your 1040 form when you file your taxes.

3. Talk to a financial adviser about life insurance benefits paid out to you, your spouse or dependent. After the life insurance death benefit proceeds are paid out, if the estate is still valued at less than your estate tax exemption amount applicable under federal law, there will be no federal estate tax assessed to you.

4. Ask your financial adviser or the financial institution where you purchased municipal bonds whether any of the municipal bonds you own, or perhaps invested in over the past year and sold off, qualify as tax-exempt investments. Two types of bonds qualify as tax-exempt: General Obligation Bonds and Revenue Bonds. Revenues earned on these particular bonds are exempt from federal income tax withholding. The tax exemption you are eligible to claim on municipal bonds applies only to the interest income you earned, and not to any capital gains that may be have been earned from selling the bonds at a higher price than was paid to purchase them. To claim the tax exemption, place the total amount of interest earned on municipal bonds for the year on Form 1040, Line 8b.

References

• World Wide Web Tax: How Much of a Tax Deduction Does the IRS Allow for Tax Exemptions?
• IRS: Publication 501
• IRS: Combat Pay

Resources

• Pacific Life Insurance: Estate Tax Exemption Amount