Each taxpayer is allowed a single personal exemption, which eventually is translated into a $1,040 reduction in income on the 1985 tax return. This is an increase from last year's $1,000 amount because of the introduction of indexing.

In addition to the individual personal exemption, a person who is 65 or older or legally blind may claim an extra $1,040 exemption. If your 65th birthday was Jan. 1, 1986, you may take the extra exemption on your 1985 tax return.

These additional exemptions for age or blindness are available only to the filing taxpayer (to both taxpayers on a joint return). Neither extra exemption may be claimed for a dependent. Exemptions for Dependents

There are five tests that must be met for a person to be claimed as a dependent on your tax return:

*Citizenship or residence test. A dependent either must be a U.S. citizen or have resided in the United States, Canada or Mexico during 1985. This test is waived for an alien child adopted by and living with a U.S. citizen in a foreign country for the entire year (or whatever part of the year they were out of the United States).

*Relationship/member of household test. A relative (as defined in the IRS instruction booklet) need not have lived in your home to qualify as your dependent.

If you file a joint return, a dependent meets this test if related to either spouse. Once a qualifying relationship has been established, it is not ended because of death or divorce. For example, if your former father-in-law meets the other tests, you may claim him as a dependent even if your wife has died and you have remarried.

A dependent who is not related must have lived in your home for the entire year; but absence at school, on vacation or for medical reasons is not disqualifying if your home was the dependent's home when he was not away.

An exchange student living in your home may not be claimed as a dependent. However, you may claim up to $50 a month of unreimbursed living expenses as a charitable contribution, either on Schedule A or, if you don't itemize, as a part of the special charity deduction.

*Income test. To qualify, a dependent must have received less than $1,040 in taxable income during 1985 (up from $1,000 because of indexing). Do not count income not subject to tax, such as nontaxable Social Security benefits, interest on tax-exempt securities, bona fide gifts or nontaxable scholarship payments.

New this year: You may exclude income earned by a permanently and totally disabled person in what is generally known as a "sheltered workshop," where the income from workshop activities is incidental to the availability of rehabilitative care and training.

The income test is waived for a child who was under the age of 19 on Dec. 31, 1985, or who was a full-time student, regardless of age, during any five months of 1985.

*Support test. To claim an exemption for a dependent, you must have provided more than half of his support during 1985. Unlike the income test, all income of a dependent (except scholarships), whether taxable or not, must be considered in determining how much the dependent contributed to his own support.

However, only that part of the total income that was actually spent during the year by the dependent (or by others on behalf of the dependent) on items of support need be included. "Items of support" refers primarily to necessary living expenses, but also includes capital items such as a car, stereo system or TV.

Do not count as support any money your dependent deposited in a savings account or otherwise invested, unless he withdrew it later in 1985 and spent it on his own support. Money paid for insurance premiums, income tax or Social Security payments by the dependent also should be excluded from the tally.

Count as a part of your contribution to his support such basic living expenses as food, lodging, clothing, medical care and education, as well as capital items bought for the dependent's own use (but not items bought for the entire household).

If the dependent lived in your home, count as support the fair-market value of the lodging you provided, but only a pro rata share of the cost of food or other elements of support.

If you provided separate living quarters (an apartment for an elderly parent, for example), count the cost to you of that housing. But if your parent lived rent-free in a house you owned, use the fair market value based on comparable housing, rather than cost.

*Joint-return test. A married person who files a joint return with his or her spouse may not be claimed as a dependent by another taxpayer, unless the joint return had been filed for the sole purpose of obtaining a refund of taxes withheld.

However, you may claim an exemption for a married dependent who meets the other tests if the dependent's spouse files a separate return and doesn't claim an exemption for your dependent. Divorced Parents

The Tax Reform Act of 1984 introduced major changes, effective in 1985, in the rules for determining which parent may claim a child as a dependent following a divorce. The new rules apply to divorces and separation agreements executed after Dec. 31, 1984; they may be applied to earlier decrees if the instruments are modified in 1985 or later years.

Under the new rule, the custodial parent is automatically entitled to claim the dependent exemption for the child, regardless of which parent provides the support. There is a loophole, however. The custodial parent may waive the right to the exemption by signing a declaration on IRS Form 8332.

That form has two parts; on one, the custodial parent may sign a permanent waiver of the claim to the exemption. As an alternative, using the other part of the form provides a waiver only for the current year, so it may be changed from year to year. In either case, the noncustodial parent who has been granted the exemption must attach Form 8332 to his or her tax return.

By granting the waiver for the dependent exemption, under the new rules the custodial parent does not lose other tax benefits and still may be able to claim head of household filing status, the earned income credit and the child care credit (assuming the collateral requirements are met in each case). Joint Support

Several taxpayers may jointly support a dependent (brothers and sisters sharing the cost of caring for a parent, for example) with no single person contributing more than half of the total support.

If together you contributed more than half the support and the dependent meets the other tests, one of the group may take the exemption if he provided at least 10 percent of the total support and the others agree to waive their claims.

Every year a different taxpayer may claim the exemption, and it may be rotated among the several contributors from year to year. Each eligible contributor must sign an IRS Form 2120 agreeing to the arrangement; the taxpayer claiming the exemption must attach all the 2120s to his tax return.