The 1986 tax law increased the annual value of personal exemptions and exemptions for dependents. For the 1987 federal tax return, each such exemption is worth $1,900, up from $1,080 last year.

The Personal Exemption

Each taxpayer is allowed a single personal exemption, which eventually is translated into a corresponding reduction of taxable income. If you're 65 or older or blind, the extra personal exemption you're accustomed to claiming is no longer available, but is replaced by a special addition to the standard deduction. Taxpayers who itemize deductions get no extra break for either age or blindness.

Exemptions for Dependents

The five tests for qualifying a dependent for tax purposes remain unchanged from previous years:

Citizenship or residence test. A dependent must be a U.S. citizen or have resided in the United States, Canada or Mexico during 1987. Exception: 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 for whatever part of the year they were out of this country.

Relationship or member of household test. To qualify as a dependent, a person must either have lived in your home or be related to you in one of the degrees specified in the Internal Revenue Service instruction booklet. If you file a joint return, a dependent meets this test if related to either spouse.

Once the relationship has been established, it is not ended because of death or divorce.

For example, if your late wife's mother meets the other tests, you may claim her as your dependent after your wife dies -- even if 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 does not disqualify the dependent if your home was his home when 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 if you itemize deductions.

Income test. A dependent must have received less than $1,900 in taxable income during 1987, up from $1,080 in 1986. Do not count bona fide gifts or income not subject to tax, such as Social Security benefits. You may exclude income earned by a permanently and totally disabled person in a sheltered workshop, where the income from workshop activities is incidental to the rehabilitative care and training.

The income test is waived for a child who was younger than 19 on Dec. 31, 1987, or who was a full-time student during at least five months of 1987. Students include those studying full time in any on-farm training course given by a state, county or local government agency.

Support test. You must have provided more than half of the support for a dependent during 1987. Unlike the income test above, all income of a dependent -- except scholarships received by full-time students -- whether taxable or not must be considered in determining how much the dependent contributed to his own support.

However, you need count only the amount that actually was spent during the year on items of support by the dependent or by others on behalf of the dependent. Items of support mostly are necessary living expenses, but also include capital items, such as a car or stereo.

Do not count any money that your dependent deposited in a savings account or invested elsewhere unless the money was withdrawn during the year and spent on support. Money paid for insurance premiums, income tax or Social Security payments by the dependent should also be excluded from the tally.

Your contributions to support include living expenses such as food, lodging, clothing, medical and dental care, recreation and education, and capital items bought for the dependent's own use. Items bought for the entire household, however, cannot be included.

If the dependent lived in your home, count the fair market value of the lodging provided, but only a pro rata share of the cost of food.

If you provided separate living quarters, such as an apartment for an elderly parent, count the cost to you of that housing. But if your dependent lived rent-free in quarters you owned, then use the fair market value based on comparable housing, rather than the 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 solely for the purpose of claiming a refund of taxes withheld.

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

For a divorce or separation agreement executed after Dec. 31, 1984, (or for earlier decrees if modified after that date), the custodial parent is automatically allowed to claim a dependent exemption for a child regardless of which parent provided the support, as long as both parents together provided more than half the child's support. However, the custodial parent may waive the right to the exemption.

For this waiver, the custodial parent must complete IRS Form 8332, which is then attached to the tax return of the noncustodial parent claiming the exemption. The form is required for each year for which the exemption is waived by one parent and claimed by the other.

By granting the waiver, the custodial parent does not lose other tax benefits and may still be able to claim head-of-household filing status, the earned income credit and the child care credit.

For couples who were divorced or separated before Jan. 1, 1985, and who haven't modified the original decrees, the old rules still apply. A stipulation that the noncustodial parent gets the exemption continues to be valid if that parent contributed at least $600 for support in 1987. If there is no stipulation, then the noncustodial parent may claim the exemption if he or she contributed at least $1,200 for support, which was also more than the contribution of the custodial parent.

Joint Support

Several people may jointly support a dependent -- such as siblings sharing the cost of caring for a parent -- with no single person contributing more than half of the support. If together you contributed more than half, one member of the group may claim the exemption if he or she provided at least 10 percent of the total and the others agree.

Each year a different taxpayer may claim the exemption, so it may be rotated from year to year. Each eligible contributor must sign an IRS Form 2120 agreeing to the arrangement; the taxpayer claiming the exemption must then attach all the 2120s to his or her tax return.

New Requirement

If you claim as a dependent a person who is 5 or older, you must enter that person's Social Security number on the line with his or her name on Form 1040 or 1040A.