SUBJECT: Personal Exemptions and Special Rules

REFERENCES: HEA 1318-2018(ss); IC 6-3-1-3.5; IRS Publication 501 (2017); IRS Publication 519 (2017).

DISCLAIMER: Information bulletins are intended to provide nontechnical assistance to the general public. Every attempt is made to provide information that is consistent with the appropriate statutes, rules, and court decisions. Any information that is not consistent with the law, regulations, or court decisions is not binding on either the department or the taxpayer. Therefore, the information provided herein should serve only as a foundation for further investigation and study of the current law and procedures related to the subject matter covered herein.

I. INTRODUCTION

Prior to 2018, Indiana followed the federal definition of dependent exemptions and tied its instructions to the federal Form 1040 variants. With the Tax Cut and Jobs Act of 2017, beginning with tax year 2018 the dependent exemption deductions for federal purposes have been reduced to zero.

HEA 1316-2018(ss) tied Indiana's dependent and certain other exemptions to the Internal Revenue Code as in effect on January 1, 2017. This bulletin provides guidance on both dependent exemptions and various other exemptions available for individual filers.

Except as specifically noted, any dollar amount quoted is the full amount of the exemption and is subject to proration if an individual and/or the individual's spouse is not an Indiana resident.

This Information Bulletin contains various references and links to federal publications. Any reference to the federal publication is to specifically-referenced sections of the publication.

II. YOURSELF AND SPOUSE

Any individual filing an Indiana tax return may claim a $1,000 exemption for themselves. This exemption is available even if the individual can be claimed as a dependent on another taxpayer's return. In addition, an individual can claim a second $1,000 exemption for the individual's spouse if the individual is married and files a joint Indiana tax return with the spouse.

Also, an individual who is married filing separately can claim a $1,000 exemption for the individual's spouse if (and only if) the spouse has no federal adjusted gross income. If an individual is claiming an exemption for a spouse with no adjusted gross income, the spouse should be listed as a dependent.

III. DEPENDENTS

An individual is permitted $1,000 for each of the individual's dependents. For Indiana purposes, the relationships and other applicable tests for determining whether a person qualifies as a dependent are determined under 2017 federal guidelines.

A taxpayer is permitted an exemption for each "qualifying child." This is not to be confused with a child qualifying for the exemption in Section IV below. To be treated as a qualifying child for pre-2018 federal tax purposes, the child generally must meet all of the following:

Other individuals also may be treated as a dependent eligible for exemption during the taxable year. These relatives include:

In addition, the individual cannot have gross income in excess of the dependent exemption as it existed under 2017 federal law ($4,050, adjusted for inflation). Further, the taxpayer must provide more than half of the individual's support during the taxable year. Finally, the individual must not be the qualifying child of any other taxpayer during the taxable year.

Please see the 2017 version of IRS Publication 501, "Exemption for Dependents," available at https://www.irs.gov/pub/irs-prior/p501--2017.pdf, for further information about 2017 federal dependent rules and special situations. For special rules relating to dependent exemptions for certain aliens, see also the 2017 version of IRS Publication 519, "U.S. Tax Guide for Aliens," chapter 5, available at https://www.irs.gov/pub/irs-prior/p519--2017.pdf.

However, there are two differences between IRS Publication 501 (2017) and Indiana law. First, for the "Gross Income Test," a person's 2018 gross income must be less than $4,150 rather than $4,050. The amounts for subsequent years will be published as part of the annual IT-40 and IT-40PNR instruction booklets. Second, the Indiana exemptions do not phase out with an increase in income.

IV. EXTRA EXEMPTION FOR CERTAIN QUALIFYING CHILDREN

An individual is also permitted a $1,500 exemption for children as defined under IRC § 151(c)(1)(B) as it was in effect on January 1, 2004. This provision was repealed in federal law; however, Indiana has retained the relevant definition.

The child must be a son, stepson, daughter, or stepdaughter of the taxpayer or an individual under the guardianship of the taxpayer. Adopted children are treated as natural children of the adoptive parent(s). Foster children who live with the taxpayer for the entire year also are treated as natural children of the taxpayer.

In addition, for taxable years beginning in 2018, the exemption is available for dependents who are under the guardianship of the taxpayer and who meet one of two age tests set forth below. Further, the child must meet the definition of a dependent for purposes of Section III.

If a child fails to meet the general dependent tests in Section III, the child is not eligible for the extra exemption.

Absent a guardianship, siblings, stepsiblings, nephews, nieces, and so forth do not qualify for this exemption, even if the individual would be considered a qualifying child for federal purposes. Also, although a permanently and totally disabled child under IRC § 152(c)(3)(B) meets the definition of qualifying child for federal tax purposes regardless of age, the child will not qualify for the $1,500 exemption unless the child meets one of the two age tests specified below.

The first age test is that the child is under the age of 19 at the end of the taxable year. The second age test is that the child be both under the age of 24 at the end of the taxable year and a full-time student for at least five months during the taxable year. If a child fails to meet either of the age tests, the child is not eligible for the $1,500 exemption.

If the taxpayer or the taxpayer's spouse qualifies for an additional federal exemption based on being 65 or older or blind (or both) at the end of the taxable year, the taxpayer is eligible for an additional $1,000 exemption for each additional federal exemption allowable. Because Indiana law directly references federal law as in effect in 2017, Indiana law permits a taxpayer to claim both exemptions for an individual if that individual is both 65 or older and blind.

VI. SPECIAL EXEMPTION FOR CERTAIN INDIVIDUALS 65 AND OLDER

If the taxpayer (or the taxpayer's spouse if filing a joint return) is 65 or older at the end of the taxable year and has a federal adjusted gross income of less than $40,000, the taxpayer is eligible for an additional $500 exemption for the taxpayer or taxpayer's spouse, provided that the individual for whom the additional exemption is claimed is 65 or older. If the taxpayer is 65 or older and the spouse is under 65, only one $500 exemption can be claimed.

VII. VERIFICATION OF DEPENDENT EXEMPTIONS

If you are claiming an exemption for a particular individual, you must provide that individual's date of birth and federal taxpayer identification number. This is the individual's Social Security number if the individual has been provided one. The Social Security Number provided for a dependent must match the name on record with the Social Security Administration If the individual has not been permitted to receive a Social Security number, the taxpayer must provide the individual's Individual Taxpayer Identification Number or Adoption Taxpayer Identification Number in order to claim the exemption. If the taxpayer claims an exemption for a dependent and does not provide a date of birth and federal taxpayer identification number for the dependent, the exemption will be disallowed.

Notwithstanding the above, if an individual would have been required to obtain an Individual Taxpayer Identification Number under pre-2018 Internal Revenue Service procedures but is not required under post-2017 procedures, you may be requested to provide the information that would have been required to be provided to the Internal Revenue Service under pre-2018 procedures in order to obtain an Individual Taxpayer Identification Number. This also applies to Individual Taxpayer Identification Numbers that expire in 2018 or later. A return claiming a dependent deduction without an appropriate identification number for that dependent must be filed on paper until further notice.

VIII. PRORATION FOR NONRESIDENTS

If an individual (or the individual's spouse) is a nonresident of Indiana for any portion of the taxable year, the individual is required to prorate the exemptions otherwise allowable. The amount of the exemptions allowable is the ratio of federal adjusted gross income attributable to Indiana to total federal adjusted gross income, multiplied by the otherwise allowable amount of exemptions. In the case of a married couple filing jointly, the Indiana adjusted gross income and federal adjusted gross income amounts must be computed on a combined basis. However, in no case will the ratio exceed one (1). In the case of a positive Indiana adjusted gross income but negative or zero federal adjusted gross income, the ratio will equal one (1).

For purposes of computing this exemption, the modifications specified under IC 6-3-1-3.5(a) are not considered.

In addition, in the case of nonresidents whose income is wholly or partially from state income taxed under a reciprocity agreement under IC 6-3-5-1, the portion of income not taxed because of the reciprocity agreement is not considered Indiana adjusted gross income for purposes of computing the exemption. This is true even if the income exempt for state purpose is subject to local income tax under IC 6-3.6. Further, a separate prorated exemption is not computed for local income tax purposes.

Adam J. Krupp

Commissioner