Module 6: Exemptions

Educational Standards

State and National Standards

Time Frame

One to two hours

Curriculum Area(s)

• Technology
• Civics/Government
• Family and Consumer Sciences
• History/Social Studies
• Economics

Purpose

To help students understand personal and dependency exemptions and how exemptions affect income that is subject to tax

Objectives

Students will be able to

• explain how exemptions affect income that is subject to tax.
• determine the number of exemptions to claim on a tax return.

Background

An exemption is a dollar amount that can be deducted from an individual’s total income, thereby reducing the taxable income. Taxpayers may be able to claim two kinds of exemptions:

• Personal exemptions generally allow taxpayers to claim themselves (and possibly their spouse)
• Dependency exemptions allow taxpayers to claim qualifying dependents (covered in Module 4)

The deduction for personal exemptions is suspended (reduced to $0) for tax years 2018 through 2025 by the Tax Cuts and Jobs Act. Although the exemption amount is zero, the ability to claim an exemption may make taxpayers eligible for other tax benefits.

Only one exemption can be claimed per person. An exemption for a particular person cannot be claimed on more than one tax return.

Key Terms

dependency exemption

Amount taxpayers can claim for their eligible dependents. Each exemption reduces the income subject to tax. The exemption amount is a set amount that generally changes annually.

exemption

Amount taxpayers can claim for themselves, their spouses, and eligible dependents. There are two types of exemptions-personal and dependency. Each exemption reduces the income subject to tax. The exemption amount is a set amount that generally changes annually.

exemption amount

The amount by which the income subject to tax is reduced for the taxpayer, spouse, and each dependent. For 2014 the exemption amount is $3,950.

personal exemption

Can be claimed for the taxpayer and spouse. Each personal exemption reduces the income subject to tax by the exemption amount.

Opening the Lesson

Hand out Fact Sheet-Exemptions. Use the following questions to prompt students to share what they know about exemptions:

• What does it mean to claim a dependency exemption? (For each dependent claimed, the taxpayer can reduce the income that is subject to tax.)
• How many exemptions can a taxpayer claim if the taxpayer is married and has two small children? (The taxpayer can claim four exemptions-two personal exemptions for the taxpayer and spouse and two dependency exemptions for the children.)

Note: For students who may want to work independently on this module, refer them to Student Lesson-Exemptions.

Developing the Lesson

Direct students to Tax Tutorial-Exemptions, and explain that this tax tutorial focuses on personal and dependency exemptions. Tell students that they will learn how exemptions affect the income that is subject to tax. Emphasize that just one exemption can be claimed per person. An exemption for a particular person cannot be claimed on more than one tax return.

Concluding the Lesson

After students have completed Tax Tutorial-Exemptions and Simulation 6-Identifying Filing Status, Dependents, and Exemptions, ask them whether they have questions about exemptions. To ensure that they understand the material, ask the following questions:

• What are the two types of exemptions? (Personal exemptions for taxpayer and spouse and dependency exemptions for dependents)
• How many exemptions can a high school student claim on her own tax return if her parents can claim her as a dependent on their tax return? (None; a taxpayer cannot claim an exemption for herself if she can be claimed as a dependent on another taxpayer's return.)