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Chapter 3. Personal Exemptions and Dependents

Social security numbers for dependents. If you claim a dependent on your tax
return, you have to list the dependent's social security number if he or she
is age one or older.

Exemption amount. The amount you may deduct as an exemption has increased
from $2,150 in 1991 to $2,300 in 1992. The amount is adjusted annually for
inflation.

Exemption phaseout. In 1992 you will lose all or part of the benefit of
your exemptions if your adjusted gross income goes above a certain level.
The income level ranges from $78,950 to $157,900 depending upon your filing
status. See Phaseout of Exemptions, later.

Important Reminder

If you do not provide a dependent's social security number when it is
required, or if you list an incorrect number, you may be subject to a
$50 penalty.

Introduction

This chapter discusses exemptions. The following topics will be explained:

∙  Personal exemptions - You can take one for yourself and, if you are
   married, one for your spouse.

∙  Dependency exemptions - You must meet five dependency tests for each
   dependent you claim. If you are entitled to claim an exemption for a
   dependent, that dependent cannot claim a personal exemption on his or
   her own tax return.

∙  Phaseout of exemptions - You get less of a deduction when your taxable
   income goes above a certain amount.

∙  Social security number (SSN) requirement for dependents - You must list
   an SSN for any dependent age one or older.

Exemptions are amounts that reduce your income. For 1992, each exemption is
worth $2,300. How you claim an exemption on your tax return depends on which
form you file.

If you file Form 1040EZ, you are allowed an exemption for yourself unless
someone else can claim you as a dependent. The exemption amount is combined
with the standard deduction amount and entered on line 4.

If you file Form 1040A or Form 1040, follow the instructions for the form.
The total number of exemptions you can claim is the total in the box on line
6e. Also complete line 21 (Form 1040A) or line 36 (Form 1040) by multiplying
the total number of exemptions shown in the box on line 6e by $2,300.

Caution. If your adjusted gross income is $78,950 or more, see Phaseout of
Exemptions, later.

Related forms.
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This chapter refers to certain forms you may need. For more information, you
may want to order the following:

    Form 2120, Multiple Support Declaration

    Form 8332, Release of Claim to Exemption for Child of Divorced or
    Separated Parents
----------------------------------------------------------------------------

Exemptions

There are two types of exemptions: personal exemptions and dependency
exemptions. While these are both worth the same amount, different
rules, discussed later, apply to each type.

Personal Exemptions

You are generally allowed one exemption for yourself and, if you are married,
one exemption for your spouse. These are called personal exemptions.

Your Own Exemption

You may take one exemption for yourself unless you can be claimed as a
dependent by another taxpayer.

Single persons. If another taxpayer is entitled to claim you as a dependent,
you may not take an exemption for yourself. This is true even if the other
taxpayer does not actually claim your exemption.

Married persons. If you file a joint return, you may take your own exemption.
If you file a separate return, you may take your own exemption only if another
taxpayer is not entitled to claim you as a dependent.

Your Spouse's Exemption

Your spouse is never considered your dependent. You are permitted one
exemption for your spouse only because you are married.

Joint return. If your spouse had any gross income, as defined in Chapter
1, you may take your spouse's exemption only if you and your spouse file
a joint return.

Separate return. If you file a separate return, you may claim the exemption
for your spouse only if your spouse had no gross income and was not the
dependent of another taxpayer. This is true even if the other taxpayer does
not actually claim your spouse's exemption. This is also true if your spouse
is a nonresident alien.

If your spouse died during the year, you may generally claim your spouse's
exemption under the rules just explained in Joint return and Separate return.

If you remarried during the year, you may not take an exemption for your
deceased spouse.

If you are a surviving spouse without gross income and you remarry, you may
be claimed as an exemption on both the final separate return of your deceased
spouse and the separate return of your new spouse whom you married in the same
year. If you file a joint return with your new spouse, you may be claimed as
an exemption only on that return.

If you obtain a final decree of divorce or separate maintenance by the end
of the year, you may not take your former spouse's exemption. This rule
applies even if you provided all of your former spouse's support.

Exemptions for Dependents

You are allowed one exemption of $2,300 for each person you can claim as a
dependent in 1992. This is called a dependency exemption.

A person is your dependent if all five of the dependency tests, discussed
below, are met. You may take an exemption for your dependent even if your
dependent files a return. However, see Joint Return Test later in this
chapter.

If your dependent files a tax return, that dependent cannot claim his or
her own exemption. For information on filing requirements for dependents,
see Dependents in Chapter 1.

If your child was born alive during the year, and the dependency tests are
met, you may take the full exemption. This is true even if the child lived
only for a moment. Whether your child was born alive depends on state or
local law. There must be proof of a live birth shown by an official document,
such as a birth certificate. You cannot claim an exemption for a stillborn
child.

If your dependent died during the year and otherwise qualified as your
dependent, you may take his or her exemption.

Example. Your dependent mother died on January 15. You may take a full
exemption for her on your return.

Housekeepers, maids, or servants who work for you may not be claimed as
dependents.

Dependency tests. The following five tests must be met for a person to be
your dependent:

1)  Member of Household or Relationship Test

2)  Citizenship Test

3)  Joint Return Test

4)  Gross Income Test

5)  Support Test

Member of Household or Relationship Test

To meet this test, a person must live with you for the entire year as a
member of your household or be related to you. If at any time during the
year the person was your spouse, this test is not met, and you may not
claim that person as a dependent.

Temporary absences. You are considered to occupy the same household despite
the temporary absence due to special circumstances of either yourself or the
other person. Temporary absences due to special circumstances include those
due to illness, education, business, vacation, and military service.

If the person is placed in a nursing home for an unspecified period of time
to receive constant medical care, the absence is considered temporary.

Death or birth. A person who died during the year, but was a member of your
household until death, will meet the member of household test. The same
is true for a child who was born during the year and was a member of your
household for the rest of the year, or would have been a member except for
any required hospital stay following birth.

A person does not meet the member of household test if at any time during your
tax year the relationship between you and that person violates local law.

A person related to you in any of the following ways does not have to live
with you or be a member of your household to meet this test.

    Your child, grandchild, great grandchild, etc. (a legally adopted child
    is considered your child)

    Your stepchild

    Your brother, sister, half brother, half sister, stepbrother, or
    stepsister

    Your parent, grandparent, or other direct ancestor, but not foster parent

    Your stepfather or stepmother

    A brother or sister of your father or mother

    A son or daughter of your brother or sister

    Your father-in-law, mother-in-law, son-in-law, daughter-in-law,
    brother-in-law, or sister-in-law

Any of the above relationships that were established by marriage are not ended
by death or divorce.

Adoption. Before legal adoption, a child is considered to be your child if
he or she was placed with you for adoption by an authorized agency and was
a member of your household. If the child was not placed with you by such an
agency, the child will meet this test only if he or she was a member of your
household for your entire tax year.

Foster individual. A foster child or adult must live with you as a member of
your household for the entire year to qualify as your dependent.

However, if a state, one of its political subdivisions, or a tax-exempt
child-placing agency makes payments to you as a foster parent, you may not
take the child as your dependent. Your expenses are incurred on behalf of the
agency that made payments to you. Expenses you incur in excess of nontaxable
payments you receive are allowed as charitable contributions. If you receive
taxable payments, your expenses may be deductible as business expenses. See
Foster-care providers under Income Not Taxed in Chapter 13 and Foster
parents in Chapter 25.

Cousin. Your cousin will meet this test only if he or she lives with you as
a member of your household for the entire year. A cousin is a descendant of
a brother or sister of your father or mother and does not qualify under the
relationship test.

Joint return. If you file a joint return, you do not need to show that
a dependent is related to both you and your spouse. You also do not need
to show that a dependent is related to the spouse who provides support.

For example, your spouse's uncle who receives more than half his support from
you may be your dependent, even though he does not live with you. If you and
your spouse file separate returns, your spouse's uncle can be your dependent
only if he is a member of your household and lives with you for your entire
tax year.

Citizenship Test

To meet the citizenship test, a person must be a U.S. citizen, resident, or
national, or a resident of Canada or Mexico for some part of the calendar
year in which your tax year begins.

Children usually are citizens or residents of the country of their parents.

If you were a U.S. citizen when your child was born, the child may be a U.S.
citizen although the other parent was a nonresident alien and the child was
born in a foreign country. If so, and the other dependency tests are met,
the child is your dependent and you may take the exemption, even if the
child lives abroad with the nonresident alien parent.

If you are a U.S. citizen who has legally adopted a child who is not a U.S.
citizen or resident, and the other dependency tests are met, the child is your
dependent and you may take the exemption if your home is the child's main home
and the child is a member of your household for your entire tax year.

Foreign students brought to this country under a qualified international
education exchange program and placed in American homes for a temporary period
generally are not U.S. residents and do not meet the citizenship test. They
may not be claimed as dependents. However, if you provided a home for a
foreign student, you may be able to take a charitable contribution deduction.
See Student Living  With You in Chapter 25.

Joint Return Test

Even if the other dependency tests are met, you are generally not allowed
an exemption for your dependent if he or she files a joint return.

Example. You supported your daughter for the entire year while her husband
was in the Armed Forces. The couple files a joint return. Even though all
the other tests are met, you may not take an exemption for your daughter.

Exception. You may take an exemption for your married dependent if neither the
dependent nor the dependent's spouse is required to file a return, but they
file a joint return to claim a refund of tax withheld and no tax liability
exists for either spouse on separate returns.

Example. Your son and his wife each had less than $1,000 of wages and no
unearned income. Neither is required to file a tax return. Taxes were withheld
from their income, so they file a joint return to get a refund. You are
allowed exemptions for your son and daughter-in-law if the other dependency
tests are met.

Gross Income Test

Generally, you may not take an exemption for a dependent if that person had
gross income of $2,300 or more for the year. This test does not apply if the
person is your child and is either under age 19, or a student under age 24,
as discussed later.

If you file on a fiscal year basis, the gross income test applies to the
calendar year in which your fiscal year begins.

Gross income is all income in the form of money, property, and services that
is not exempt from tax.

In a manufacturing, merchandising, or mining business, gross income is the
total net sales minus the cost of goods sold, plus any miscellaneous income
from the business.

Gross receipts from rental property are gross income. You may not deduct
taxes, repairs, etc., to determine the gross income from rental property.

Gross income includes a partner's share of the gross, not a share of the net,
partnership income.

Gross income also includes all unemployment compensation and certain
scholarship and fellowship grants. Scholarships received by degree candidates
that are used for tuition, fees, and books and equipment required for
particular courses are not included in gross income. For more information,
see Chapter 13.

Tax-exempt income, such as certain social security payments, is not included
in gross income. See Income Not Taxed in Chapter 13.

Gross income does not include income received by a permanently and totally
disabled individual at a sheltered workshop. The availability of medical care
must be the main reason the individual is at the workshop, and the income
must come solely from activities at the workshop that are incident to this
medical care. A sheltered workshop is a school operated by certain tax-exempt
organizations, or by a state, a U.S. possession, a political subdivision of
a state or possession, the United States, or the District of Columbia, that
provides special instruction or training designed to alleviate the disability
of the individual.

Your child is your son, stepson, daughter, stepdaughter, a legally adopted
child, or a child who was placed with you by an authorized placement agency
for your legal adoption. A foster child who was a member of your household
for your entire tax year is also considered your child. See Foster individual,
earlier.

If your child is under 19 at the end of the year, the gross income test
does not apply. Your child may have any amount of income and still be your
dependent, if the other dependency tests are met.

Example. Marie Grey, 18, earned $2,400. Her father provided more than half
her support. Marie may be claimed as a dependent because the gross income
test does not apply and the other dependency tests were met.

If your child is a student, the gross income test does not apply if the child
is under age 24 at the end of the calendar year. The other dependency tests
must still be met.

To qualify as a student your child must be, during some part of each of 5
calendar months during the calendar year (not necessarily consecutive):

1)  A full-time student at a school that has a regular teaching staff, course
    of study, and regularly enrolled body of students in attendance, or

2)  A student taking a full-time, on-farm training course. The course has to
    be given by a school or a state, county, or local government. The school
    must have a regular teaching staff, course of study, and regularly
    enrolled body of students in attendance.

A full-time student is one who is enrolled for the number of hours or courses
the school considers to be full-time attendance.

The term "school" includes elementary schools, junior and senior high schools,
colleges, universities, and technical, trade, and mechanical schools. It does
not include on-the-job training courses, correspondence schools, and night
schools.

Example. James Clay, 22, attends college as a full-time student. During the
summer, James earned $2,700, which he spent for his support. His parents
provided more than $2,700 toward his support and the other dependency tests
were met. On their return, they may take the exemption for James as a
dependent.

Vocational high school students who work on "co-op" jobs in private industry
as a part of the school's prescribed course of classroom and practical
training are considered full-time students.

Night school. Your child is not a full-time student while attending school
only at night. However, full-time attendance at a school may include some
attendance at night as part of a full-time course of study.

Support Test

You must provide more than half of a person's total support during the
calendar year to meet the support test. You figure whether you have provided
more than half by comparing the amount you contributed to the person's support
with the entire amount of support the person received from all sources. This
amount includes the person's own funds used for support. You may not include
in your contribution any part of your child's support that is paid for by
the child with the child's own wages, even if you pay the wages. See Total
Support, later. For exceptions to the support test, see Multiple Support
Agreement and Support Test for Divorced or Separated Parents, later.

A person's own funds are not support unless they are actually spent for
support.

Example. Your mother received $2,400 in social security benefits and $300 in
interest. She paid $2,000 for lodging, $400 for recreation, and $300 for life
insurance premiums.

Even though your mother received a total of $2,700, she spent only $2,400 for
her own support. Life insurance premiums are not support items. If you spent
more than $2,400 for her support and no other support was received, you have
provided more than half her support.

The total cost, not the period of time you provide the support, determines
whether you provide more than half of the support.

The year you provide the support is the year you pay for it, even if you do
so with borrowed money that you repay in a later year.

If you use a fiscal year to report your income, you must provide more than
half of the dependent's support for the calendar year in which your fiscal
year begins.

Armed Forces dependency allotments. Both the part of the allotment contributed
by the government and the part withheld from your military pay are considered
provided by you in figuring whether you provide more than half of the support.
If your allotment is used to support persons other than those you name, you
may take the exemptions for them if they otherwise qualify as dependents.

Example. You are in the Armed Forces. You authorize an allotment for your
widowed mother that she uses for the support of herself and your sister. If
it provides more than half of their support, you may take an exemption for
each of them, even though you authorize the allotment only for your mother.

Tax-exempt military quarters allowances are treated the same way as dependency
allotments in figuring support. Both the allotment of pay and the tax-exempt
basic allowance for quarters are considered as provided by you for support.

Tax-exempt income. In figuring a person's total support, include tax-exempt
income, savings, and borrowed amounts used to support that person. Tax-exempt
income includes certain social security benefits, welfare benefits, nontaxable
life insurance proceeds, Armed Forces family allotments, nontaxable pensions,
and tax-exempt interest.

Example 1. You provide $2,000 for your mother's support during the year. She
has taxable income of $600, nontaxable social security benefit payments of
$1,800, and tax-exempt interest of $200. She uses all these for her support.
You may not claim your mother as a dependent because the $2,000 you provide
is not more than half of her total support of $4,600.

Example 2. Your daughter takes out a student loan of $2,500 and uses it to pay
her college tuition. She is personally responsible for the loan. You provide
$2,000 toward her total support. You may not claim your daughter as a
dependent because you provide less than half of her support.

Social security benefit payments. If a husband and wife each receive social
security benefit payments that are paid by one check made out to both of them,
half of the total paid is considered to be for the support of each spouse,
unless they can show otherwise.

If a child receives social security benefits and uses them toward his or her
own support, the payments are considered provided by the child.

State benefit payments (welfare, food stamps, housing, etc.) based on need are
considered as support provided by the state, unless it is shown otherwise. For
example, AFDC (Aid to Families with Dependent Children) is not support
provided by the parent. It is support provided by the state.

Home for the aged. If you make a lump-sum advance payment to a home for the
aged to take care of your relative for life and the payment is based on that
person's life expectancy, the amount of your support each year is the lump-sum
payment divided by the relative's life expectancy. Your support also includes
any other amounts that you provided during the year.

Total Support

To figure if you provided more than half of the support of a person, you must
first determine the total support provided for that person. Total support
includes amounts spent to provide food, lodging, clothing, education, medical
and dental care, recreation, transportation, and similar necessities.

Generally, the amount of an item of support is the amount of the expense
incurred in providing that item. Expenses that are not directly related to
any one member of a household, such as the cost of food for the household,
must be divided among the members of the household. If the item is property
or lodging, the amount of such item is its fair rental value.

Example. Your parents live with you, your spouse, and your two children in a
house you own. The fair rental value of your parents' share of lodging is
$2,000 a year, which includes furnishings and utilities. Your father receives
a nontaxable pension of $4,200, which he spends equally for items of support
such as clothing, transportation, and recreation, for your mother and himself.
Your total food expense for the household is $6,000. Your heat and utility
bills amount to $1,200. Your mother has hospital and medical expenses of $600,
which you pay during the year. Figure your parents' total support as follows:

                                                Support
                                                provided
                                          Father        Mother
     Fair rental value of lodging.......  $1,000        $1,000
     Pension spent for their support....   2,100         2,100
     Share of food (1/6 of $6,000)......   1,000         1,000
     Medical expenses for mother........                   600
                                        __________    __________
     Parents' total support               $4,100        $4,700
                                        ==========    ==========

Since you provided different amounts to each parent, you must figure the
dependency status of each parent separately. You provide $2,000 ($1,000
lodging, $1,000 food) of your father's total support of $4,100 - less than
half. You provide $2,600 to your mother ($1,000 lodging, $1,000 food, $600
medical) - more than half of her total support of $4,700. You may claim your
mother as a dependent, but not your father. Heat and utilities are included in
the fair rental value of the lodging, so these are not considered separately.

Lodging is the fair rental value of the room, apartment, or house in which the
person lives. It includes a reasonable allowance for the use of furniture and
appliances, and for heat and other utilities.

The fair rental value is the amount you could reasonably expect to receive
from a stranger for the same kind of lodging. It is used in place of rent or
taxes, interest, depreciation, paint, insurance, utilities, cost of furniture
and appliances, etc. In some cases, fair rental value may be equal to the rent
paid.

If you are considered to provide the total lodging, determine the fair rental
value of the room the person uses, or a share of the fair rental value of
the entire dwelling if the person has use of your entire home. If you do
not provide the total lodging, the total fair rental value must be divided
depending on how much of the total lodging you provide. If you provide only a
part and the person supplies the rest, the fair rental value must be divided
between the two of you according to the amount each of you provides.

Example. Your parents live rent free in a house you own. It has a fair rental
value of $5,400 a year furnished, which includes a fair rental value of $3,600
for the house and $1,800 for the furniture. This does not include heat and
utilities. The house is completely furnished with furniture belonging to your
parents. You pay $600 for their utility bills. Utilities are not usually
included in rent for houses in the area where your parents live. Therefore,
you consider the total fair rental value of the lodging to be $6,000 ($3,600
fair rental value of the unfurnished house, $1,800 allowance for furnishings
provided by your parents, and $600 cost of utilities) of which you are
considered to provide $4,200 ($3,600 + $600).

Person living in his or her own home. The total fair rental value of a
person's home that he or she owns is considered support contributed by that
person.

If you help to keep up the home by paying interest on the mortgage, real
estate taxes, fire insurance premiums, ordinary repairs, or other items
directly related to the home, or give someone cash to pay those expenses,
reduce the total fair rental value of the home by those amounts in figuring
that person's own contribution.

Example. You provide $6,000 cash for your father's support during the year.
He lives in his own home, which has a fair rental value of $6,600 a year. He
uses $800 of the money you give him to help pay his real estate taxes. Your
father's contribution for his own lodging is $5,800 ($6,600 &minus $800 for
taxes).

If you live with a person rent free in his or her home, you must reduce the
amount you provide for support by the fair rental value of lodging he or she
provides you.

Property provided as support is measured by its fair market value.

Capital expenses. Capital items, such as furniture, appliances, and cars, that
are bought for a person during the year may be included in total support under
certain circumstances.

The following examples show when a capital item is or is not support.

Example 1. You buy a $200 power lawn mower for your 13-year-old child. The
child is given the duty of keeping the lawn trimmed. Because a lawn mower is
ordinarily an item you buy for personal and family reasons that benefits all
members of the household, you cannot include the cost of the lawn mower in the
support of your child.

Example 2. You buy a $150 television set as a birthday present for your
12-year-old child. The television set is placed in your child's bedroom.
You include the cost of the television set in the support of your child.

Example 3. You pay $5,000 for a car and register it in your name. You and your
17-year-old daughter use the car equally. Because you own the car and do not
give it to your daughter but merely let her use it, you cannot include the
cost of the car in your daughter's total support. However, you can include
in your daughter's support your out-of-pocket expenses of operating the car
for her benefit.

Example 4. Your 17-year-old son, using personal funds, buys a car for $4,500.
You provide all the rest of your son's support - $4,000. Since the car is
bought and owned by your son, the car's fair market value ($4,500) must be
included in his support. The $4,000 support you provide is less than half of
his total support of $8,500. You cannot claim your son as a dependent.

Medical insurance premiums include premiums you pay for supplementary Medicare
coverage. These are included in the total support you provide.

Medical insurance benefits, including basic and supplementary Medicare
benefits, are not part of support.

Amounts veterans receive under the GI Bill for tuition payments and allowances
while they attend school are included in total support.

Example. During the year, your son receives $2,200 from the government under
the GI Bill. He uses this amount for his education. You provide the rest of
his support - $2,000. Because GI benefits are included in total support, your
son is not your dependent.

Other items may be considered as support depending on the facts in each case.
For example, if you pay someone to provide child care or disabled dependent
care, you may include these payments as support, even if you claim a credit
for them. For information on the credit, see Chapter 33.

Do Not Include in Total Support

The following items are not included in total support:

1)  Federal, state, and local income taxes paid by persons from their own
    income.

2)  Social security and Medicare taxes paid by persons from their own income.

3)  Life insurance premiums.

4)  Funeral expenses.

5)  Scholarships received by your child if your child is a full-time student.
    (If a child is committed to a state training school because of antisocial
    behavior, the value of the room, board, and education provided is not a
    scholarship. It must be included in support.)

6)  Survivors' and Dependents' Educational Assistance payments used for
    support of the child who receives them.

Multiple Support Agreement

Sometimes no one provides more than half of the support of a person. Instead,
two or more persons, each of whom would be able to take the exemption but
for the support test, together provide more than half the person's support.

When this happens, you may agree that any one of you who individually provides
more than 10% of the person's support, but only one, may claim an exemption
for that person. Each of the others must sign a written statement agreeing not
to claim the exemption for that year. The statements must be filed with the
income tax return of the person who claims the exemption. Form 2120, Multiple
Support Declaration, is used for this purpose.

Example 1. You, your sister, and your two brothers provide the entire support
of your mother for the year. You provide 45%, your sister 35%, and your two
brothers each provide 10%. Either you or your sister may claim an exemption
for your mother. The other must sign a Form 2120 or a written statement
agreeing not to take an exemption for her. Because neither brother provides
more than 10% of the support, neither can take the exemption. They do not
have to sign a Form 2120 or the written statement.

Example 2. You and your brother each provide 20% of your mother's support for
the year. The remaining 60% of her support is provided equally by two persons
who are not related to her. She does not live with them. Because more than
half of her support is provided by persons who cannot claim her as a
dependent, no one may claim the exemption.

Example 3. Your father lives with you and receives 25% of his support from
social security, 40% from you, 24% from his brother, and 11% from a friend.
Either you or your uncle may take the exemption for your father. A Form
2120 or a written statement from the one not claiming the exemption must be
attached to the return of the one who takes the exemption.

Support Test for Divorced or Separated Parents

The support test for a child of divorced or separated parents is based on
special rules that apply only if:

1)  The parents are divorced or legally separated under a decree of divorce
    or separate maintenance, or separated under a written separation
    agreement, or lived apart at all times during the last 6 months of
    the calendar year,

2)  One or both parents provide more than half of the child's total support
    for the calendar year, and

3)  One or both parents have custody of the child for more than half of the
    calendar year.

"Child" is defined earlier under the Gross Income Test.

Exceptions. This discussion does not apply in any of the following situations:

1)  A third party, such as a relative or friend, provides half of the child's
    support or more,

2)  The child is in the custody of a person other than the parents for half
    of the year or more,

3)  The support of the child is determined under a multiple support
    agreement, as discussed earlier, or

4)  The parents are separated under a written separation agreement or are
    living apart, but they file a joint return for the tax year.

Custodial parent. The parent who has custody of the child for the greater part
of the year is generally treated as the parent who provides more than half of
the child's support. It does not matter whether that parent actually provided
more than half of the support. However, see Noncustodial parent, later.

Custody is usually determined by the terms of the most recent decree of
divorce or separate maintenance, or a later custody decree. If there is
no decree, use the written separation agreement. If neither a decree nor
agreement establishes custody, then the parent who has the physical custody
of the child for the greater part of the year is considered to have custody of
the child. This also applies if the validity of a decree or agreement awarding
custody is uncertain because of legal proceedings pending on the last day of
the calendar year.

If the parents are divorced or separated during the year and had joint custody
of the child before the separation, the parent who has custody for the greater
part of the rest of the year is considered to have custody of the child for
the tax year.

Example 1. Under the terms of your divorce, you have custody of your child
for 10 months of the year. Your former spouse has custody for the other 2
months. You and your former spouse provide the child's total support. You
are considered to have provided more than half of the support of the child.
However, see Noncustodial parent, below.

Example 2. Assume that in Example 1 your aunt gives $2,000 of the $3,100
necessary to support your child. Neither you nor your former spouse may claim
the child as a dependent because the two of you did not provide more than
half of the child's support.

Noncustodial parent. The noncustodial parent will be treated as providing more
than half of the child's support if:

1)  The custodial parent signs a written declaration that he or she will not
    claim the exemption for the child, and the noncustodial parent attaches
    this written declaration to his or her return,

2)  A decree or agreement went into effect after 1984 and it unconditionally
    states that the noncustodial parent can claim the child as a dependent,
    or

3)  A decree or agreement executed before 1985 provides that the noncustodial
    parent is entitled to the exemption, and he or she provides at least $600
    for the child's support during the year, unless the pre-1985 decree or
    agreement is modified after 1984 to specify that this provision will not
    apply.

Example. Under the terms of your 1982 divorce decree, your former spouse has
custody of your child. The decree specifically states that you are entitled to
the exemption. You provide at least $600 in child support during the calendar
year. You are considered to have provided more than half of the child's
support.

Written declaration. The custodial parent should use Form 8332, Release of
Claim to Exemption for Child of Divorced or Separated Parents, or a similar
statement, to make the written declaration to release the exemption to the
noncustodial parent. The noncustodial parent must attach the form or
statement to his or her tax return.

The exemption may be released for a single year, for a number of specified
years (for example, alternate years), or for all future years, as specified
in the declaration. If the exemption is released for more than one year, the
original release must be attached to the return of the noncustodial parent for
the first year of such release, and a copy of the release must be attached to
the return for each succeeding taxable year for which the noncustodial parent
claims the exemption.

Children who didn't live with you. If you are claiming a child who didn't live
with you under the rules for children of divorced or separated parents, enter
the number of children who did not live with you (or who lived with their
other parent for the greater part of the year) on the line to the right of
line 6c labeled "No. of your children on 6c who didn't live with you due to
divorce or separation."

Then you must either:

1)  Check the box on line 6d if your divorce decree or written separation
    agreement was in effect before 1985 and it states that you can claim
    the child as your dependent, or

2)  Attach Form 8332 or a similar statement to your return. If your divorce
    decree or separation agreement went into effect after 1984 and it
    unconditionally states that you can claim the child as your dependent,
    you may attach a copy of the following pages from the decree or agreement
    instead of Form 8332:

      Cover page (write the other parent's social security number on this
      page),

      The page that unconditionally states you can claim the child as your
      dependent, and

      Signature page showing the date of the agreement.

Enter the total number of children who did not live with you for reasons other
than divorce or separation on the line labeled "No. of other dependents listed
on 6c." Include your dependent children who were not U.S. citizens and who
lived in Canada or Mexico during 1992.

Child support. All child support payments actually received from the
noncustodial parent are considered used for the support of the child.

Example. The noncustodial parent provides $1,200 for the child's support.
This amount is considered as support provided by the noncustodial parent
even if the $1,200 was actually spent on things other than support.

Support payments for an earlier year. If support payments made this year are
not more than the amount required of the noncustodial parent, the amount of
support provided by that parent is not reduced by any payment of support that
parent owed for an earlier year. If the support payments are more than the
amount required for this year, any payment for an earlier year is not support
provided by the noncustodial parent for either the earlier year or for this
year. It is reimbursement to the custodial parent for amounts paid for the
support of the children in an earlier year.

Example. Under your divorce decree, you must pay $400 a month to your former
spouse for the support of your two children. Last year you paid $4,000 instead
of $4,800 due for the year. This year, if you pay the full amount, the entire
$4,800 is considered support that you provided. If you also pay any part of
the $800 you owe from last year, that amount is not included as support
provided by you in either year.

Support provided by a third party for a divorced or separated parent is not
included as support provided by that parent. However, see Remarried parent,
below.

Example. You are divorced. During the whole year, you and your child live with
your mother in a house she owns. The fair rental value of the lodging provided
by your mother for your child is $1,000. The home provided by your mother is
not included in the amount of support you provide.

Remarried parent. If you remarry, the support provided by your new spouse is
treated as provided by you.

Example. You have two children from a former marriage who live with you.
You have remarried and are living in a home owned by your present spouse.
The fair rental value of the home provided to the children by your present
spouse is treated as provided by you.

Home jointly owned. If you and your former spouse have the right to use and
live in the home, each of you is considered to provide half of your child's
lodging. However, if the divorce decree gives only you the right to use and
live in the home, you are considered to provide your child's entire lodging.
It does not matter if the legal title to the home remains in the names of
both parents.

Medical expenses. A child of divorced or separated parents or of parents who
live apart during the last 6 months of the year, is treated as a dependent of
both parents for the medical expense deduction if the child receives more than
half of his or her support from the parents. Thus, a parent can deduct medical
expenses he or she paid for the child even though the other parent claims an
exemption for the child. This special rule does not apply if more than half
of the child's support is treated as received from a person under a multiple
support agreement.

Phaseout of Exemptions

The amount you can claim as a deduction for exemptions is phased out once your
adjusted gross income (AGI) goes above a certain level for your filing status.
These levels are as follows:

                                                AGI Level
                                              Which Reduces
     Filing Status                           Exemption Amount

     Married filing separately                  $ 78,950
     Single                                      105,250
     Head of household                           131,550
     Married filing jointly                      157,900
     Qualifying widow(er)                        157,900

You must reduce the dollar amount of your exemptions by 2% for each $2,500, or
part of $2,500 ($1,250 if you are married filing separately), that your AGI
exceeds the amount shown above for your filing status.

If your AGI exceeds the level for your filing status, use the Deduction for
Exemptions Worksheet shown below to figure the amount of your 1992 exemptions.

                   Deduction for Exemptions Worksheet

     1.Multiply $2,300 by the total number of
       exemptions claimed on Form 1040, line 6e................    1.___________

     2.Enter the amount from Form 1040,
       line 32...................................     2.__________

     3.Enter on line 3 the amount shown below for
       your filing status:
       ∙ Married filing separately, enter $78,950
       ∙ Single, enter $105,250
       ∙ Head of household, enter $131,550            3.__________
       ∙ Married filing jointly or Qualifying
         widow(er),enter $157,900

     4.Subtract line 3 from line 2................    4.__________
       Note: If line 4 is more than $122,500 (more
       than $61,250 if married filing stop here; you
       may not take a deduction for exemptions.
       Enter 0 on Form 1040, line 36.

     5.Divide line 4 by $2,500 ($1,250
       if married filing separately).
       If the result is not a whole
       number, round it up to the next
       higher whole number........................    5.__________

     6.Multiply line 5 by 2% (.02), and
       enter the result as a decimal
       amount.....................................    6.__________

     7.Multiply line 1 by line 6................................    7.__________

     8.Deduction for exemptions. Subtract line
       7 from line 1. Enter the result here and
       on Form 1040, line 36....................................    8.__________


Social Security Number for Dependents

If you claim a dependent who is at least one year old by the end of your tax
year, you must list the dependent's social security number (SSN) on your Form
1040 or Form 1040A. If you do not list the dependent's SSN when required or
if you list an incorrect SSN, you may be subject to a $50 penalty.

No social security number. If a person whom you expect to claim as a dependent
on your return does not have an SSN, either you or that person should apply
for an SSN as soon as possible by filing Form SS─5 with  the Social Security
Administration (SSA). Information about applying for an SSN and Form SS─5 is
available at your local SSA office.

It usually takes about 2 weeks to get an SSN. If your dependent will not
have a number by the time you are ready to file your tax return, ask the
SSA to give you a Form SSA─5028, Receipt for Application for a Social
Security Number.

If you or your dependent does not receive an SSN by the time you are ready
to file, you should file your return and write "Applied for" in the space
provided for the number. If you have a Form SSA─5028, attach a copy to your
return.

Dependents living in Mexico or Canada. Taxpayers who claim dependents living
in Mexico or Canada must have SSNs for these dependents.

To obtain SSNs for these dependents, complete Form SS─5 and check the "Other"
box for Line 3, Citizenship. Attach a statement to explain that the SSN is
needed for income tax purposes for a dependent living in Mexico or Canada.

A dependent living in Mexico may apply for an SSN at the U.S. Embassy in
Mexico City or at a foreign service post in Ciudad Juarez, Guadalajara,
Hermosillo, Matamoros, Mazatlan, Monterrey, Merida, or Tijuana. If you
claim a dependent who lives in Mexico, enter "F" instead of a number
in column (5) of line 6c of your Form 1040 or Form 1040A.

A dependent living in Canada may apply for an SSN at the American Embassy in
Ottawa or at a consulate. Those living near the U.S. border may also apply
at a Social Security Administration office in a nearby American city. If you
claim a dependent who lives in Canada, enter "F" instead of a number in column
(5) of line 6c of your Form 1040 or Form 1040A.