by Chris Messner

Created on: July 30, 2008

Ah, one of life's great mysteries - deciphering the monstrosity: United States Code, Title 26 (26USC), popularly known as the "tax code". It seems intimidating, but it really isn't. The entire United States Code (popularly known as "federal law") is available on line, and, while it is both extremely lengthy and verbose, it is also logically laid out. In examining it, once you get on the right track, you should have no trouble identifying and understanding the items you're interested in learning about.

The Internal Revenue Service also runs a very helpful and informative web site, www.irs.gov, where you should be able to find the answers to all your tax questions, and where you can either peruse or print all their publications and forms.

When it comes to federal tax exemptions, they apply in two areas: Income tax withholding and filing your tax return.

For withholding, regardless of family or marital status, the taxpayer can claim anywhere from zero to 10 exemptions. The taxpayer can change this number at any time by filing a new form W-4 with his or her employer, either on paper or electronically. Filing a W-4 also permits the taxpayer to specify an additional dollar amount to be withheld, which is then added to the withholding based on the number of exemptions claimed.

Zero withholding exemptions results in the most money being withheld from the taxpayer on each payday, while 10 exemptions results in the least being withheld, typically nothing.

For states that also withhold income tax, state withholding is based on the number of federal exemptions claimed, so when a taxpayer adjusts withholding exemptions and amounts, both federal and state withholding changes.

On the actual tax return, marital and family status does matter and must be precisely reported. Taxpayers can only claim the exact number of exemptions they're entitled to under the tax code. For example, a family of four with 2 dependent children under the age of 19 (or 24 if a full-time student) would claim 4 exemptions, while a single adult living alone would claim 1 exemption. For 2007, the amount of income exempted per exemption is $3400, so the family would be able to exempt $13,600 of their gross income from taxation, while the single adult would be able to exempt $3400.

Exemptions should not be confused with deductions, which are subtracted from the income remaining AFTER exemptions have been applied. IRS Publication 501 contains all the information a taxpayer needs concerning exemptions and deductions as they pertain to a tax return.

Good luck!

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