Exemptions reduce your taxable income. Generally, you can deduct $3,050 for each exemption you claim in 2003. But, you may lose the benefit of part or all of your exemption if your adjusted gross income is above a certain amount. See Phaseout of Exemptions, later.

How you claim an exemption on your tax return depends on which form you file.

If you file Form 1040EZ, the exemption amount is combined with the standard deduction amount and entered on line 5.

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 6d. Also complete line 26 (Form 1040A) or line 39 (Form 1040) by multiplying the total number of exemptions shown in the box on line 6d by $3,050. If your adjusted gross income is more than $104,625, see Phaseout of Exemptions, later.

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

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

On a joint return you can claim one exemption for yourself and one for your spouse.

If you file a separate return, you can 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 can generally claim your spouse's exemption under the rules just explained under Joint return and Separate return.

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

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

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

You may be eligible to claim the exemption for a child even if the child has been kidnapped. For more information, see Publication 501.

If your child was born alive during the year, and the dependency tests are met, you can claim the exemption. This is true even if the child lived only for a moment. State or local law must treat the child as having been born alive. 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 met the dependency tests, you can claim the exemption for your dependent.

If these people work for you, you cannot claim exemptions for them.

You may be entitled to a child tax credit for each of your qualifying children for whom you can claim an exemption. For more information, see chapter 36.

A person lives with you as a member of your household even if either (or both) of you are temporarily absent due to special circumstances. Temporary absences due to special circumstances include absences because of illness, education, business, vacation, or military service.

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

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. The test is also met if a child 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 for the entire year as a member of your household to meet this test.

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

Even if your adoption of a child is not yet final, the child is considered to be your child if he or she was placed with you for legal adoption by an authorized placement agency. The child also must be a member of your household, but does not have to be a member of your household for the entire year.

If the child was not placed with you by an authorized placement agency, the child will meet this test only if he or she was a member of your household for your entire tax year.

An authorized placement agency includes any person or court authorized by state law to place children for legal adoption.

A foster child must live with you as a member of your household for the entire year to qualify as your dependent. For this test, a foster child is one who is in your care that you care for as your own child. It does not matter how the child became a member of the household.

You can claim an exemption for your cousin 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.

If you file a joint return, you do not need to show that a person is related to both you and your spouse. You also do not need to show that a person 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. However, 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.

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, you can take the exemption. It does not matter 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, you can 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 citizen or resident test. You cannot claim exemptions for them. However, if you provided a home for a foreign student, you may be able to take a charitable contribution deduction. See Expenses Paid for Student Living With You in chapter 26.

The joint return test does not apply if a joint return is filed by the dependent and his or her spouse merely as a claim for refund and no tax liability would exist for either spouse on separate returns.

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

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. Do 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, supplies, books, and equipment required for particular courses are not included in gross income. For more information about scholarships, see chapter 13.

Tax-exempt income, such as certain social security payments, is not included in gross income.

For this gross income test, gross income does not include income received by a permanently and totally disabled individual for services performed at a sheltered workshop. The availability of medical care must be the main reason the individual is at the workshop. Also, 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.

For purposes of the gross income test, 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.

If your child is under 19 at the end of the year, the gross income test does not apply. Your child can have any amount of income and you can still claim an exemption if the other dependency tests, including the support test, are met.

The gross income test does not apply if your child is a student who 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):

A full-time student is a person 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.

People 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.

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

You figure whether you have provided more than half of a person's total support by comparing the amount you contributed to that person's support with the entire amount of support that person received from all sources. This includes support the person provided from his or her own funds.

You may find Table 3–1

Table 3–1. Worksheet for Determining Support

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

You cannot include in your contribution to your child's support any support that is paid for by the child with the child's own wages, even if you paid the wages.

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.

The part of the allotment contributed by the government and the part taken out of your military pay are both 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 can take the exemptions for them if they otherwise qualify.

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

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.

If a husband and wife each receive 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 as provided by the child.

Benefits provided by the state to a needy person generally are considered support provided by the state. However, payments based on the needs of the recipient will not be considered as used entirely for that person's support if it is shown that part of the payments were not used for that purpose.

Payments you receive for the support of a foster child from a child placement agency are considered support provided by the agency. Similarly, payments you receive for the support of a foster child from a state or county are considered support provided by the state or county.

If you are not in the trade or business of providing foster care to a child and your unreimbursed out-of-pocket expenses in caring for a foster child were mainly to benefit an organization qualified to receive deductible charitable contributions, the expenses are deductible as charitable contributions, but are not considered support you provided. For more information about the deduction for charitable contributions, see chapter 26. If your unreimbursed expenses are not deductible as charitable contributions, they are considered support you provided.

If you are in the trade or business of providing foster care, your unreimbursed expenses are not considered support provided by you.

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 support you provide each year is the lump-sum payment divided by the relative's life expectancy. The amount of support you provide also includes any other amounts that you provided during the year.

If you provide a person with lodging, you are considered to provide support equal to the fair rental value of the room, apartment, house, or other shelter in which the person lives. Fair rental value includes a reasonable allowance for the use of furniture and appliances and for heat and other utilities that are provided.

This is the amount you could reasonably expect to receive from a stranger for the same kind of lodging. It is used instead of actual expenses, such as rent, 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 provide the total lodging, the amount of support you provide is 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 both of you according to the amount each provides.

The total fair rental value of a person's home that he or she owns is considered support contributed by that person.

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. Fair market value is the price that property would sell for on the open market. It is the price that would be agreed upon between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.

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

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

Medical insurance premiums you pay, including premiums for supplementary Medicare coverage, are included in the 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.

If you pay someone to provide child care or disabled dependent care, you can include these payments in the amount you provided for the support of your child or disabled dependent, even if you claim a credit for the payments. For information on the credit, see chapter 34.

Other items may be considered as support depending on the facts in each case.

The parent who has custody of the child for the greater part of the year (the custodial parent) is generally treated as the parent who provides more than half of the child's support. It does not matter whether the custodial parent actually provided more than half of the support.

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.

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

The noncustodial parent is the parent who has custody of the child for the shorter part of the year or who does not have custody at all.

The custodial parent may use either Form 8332 or a similar statement (containing the same information required by the form) 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 can 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 must be attached for each later year.

If your divorce decree or separation agreement was executed after 1984, the noncustodial parent does not have to attach Form 8332 if both of the following requirements are met.

If these requirements are not met, the noncustodial parent must attach to his or her return Form 8332 or a similar statement from the custodial parent releasing the exemption.

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

If you fail to pay child support in the year it is due, but pay it in a later year, your payment of the overdue amount is not considered paid for the support of your child, either for the year the payment was due or for the year it is paid. It is payment of an amount you owed to the custodial parent, but it is not considered paid by you for the support of your child.

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, later.

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

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.

If a person for whom you expect to claim an exemption 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, Application for a Social Security Card, 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 you do not have a required SSN by the filing due date, you can file Form 4868 for an extension of time to file.

If your child was born and died in 2003, and you do not have an SSN for the child, you may attach a copy of the child's birth certificate instead. If you do, enter “DIED” in column (2) of line 6c of your Form 1040 or Form 1040A.

If your dependent is a resident or nonresident alien who does not have and is not eligible to get an SSN, the IRS will issue your dependent an individual taxpayer identification number (ITIN) instead of an SSN. Write the number in column (2) of line 6c of your Form 1040 or Form 1040A. To apply for an ITIN, use Form W–7, Application for IRS Individual Taxpayer Identification Number.

It usually takes about 4 to 6 weeks to get an ITIN.

If you have a child who was placed with you by an authorized placement agency, you may be able to claim an exemption for the child. However, if you cannot get an SSN or an ITIN for the child, you must get an adoption taxpayer identification number (ATIN) for the child from the IRS. See Form W–7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, for details.