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THE UNITED STATES TAX SYSTEM: AN OVERVIEW(b) Dependent ExemptionIn addition to deducting an amount from adjusted gross income as a personalexemption, individual taxpayers can deduct the same amount as a dependencydeduction. When the taxpayer meets a five-part test—member of household orrelationship test; citizenship test; joint return test; gross income test; supporttest—a deduction is allowable for a dependent.(c) Phaseout of ExemptionsThe deduction for personal and dependent exemptions is phased out for taxpayerswith adjusted gross income above a threshold amount (indexed for inflation),which is based on filing status. 22The total amount of exemptions that may be claimed by a taxpayer isreduced by 2 percent for each $2,500 (or portion of that amount) by which thetaxpayer’s adjusted gross income exceeds the applicable threshold. The phaseoutrate is 2 percent for each $1,250 for married taxpayers filing separate taxreturns. 23This exemption phaseout rule is scheduled to be repealed over a five-yearphase-in period. The otherwise applicable personal exemption phaseout isreduced by one-third in tax years beginning in 2006 and 2007, and is reduced bytwo-thirds in tax years beginning in 2008 and 2009. This repeal is to be fullyeffective for tax years beginning after December 31, 2009. 24§ 2.8 TAXABLE AND NONTAXABLE ENTITIESThe entities subject to the imposition of a federal income tax are, as noted, corporations,25 individuals, 26 estates, 27 and trusts. 28 Due to the nature of the incometax system, an anomaly is created by the taxation of corporate entities. Corporationsare legal fictions—recognized by the law as entities that are owned by theirstockholders. Income received by a corporation generally is subject to an incometax. When the corporation pays out its income in the form of dividends to stockholders,the income is again subject to tax at the individual level. This results indouble taxation; first at the corporate level, then again at the individual level.To alleviate this burden, certain corporations that meet special statutory criteriaare not taxed at the corporate level, but only at the individual level. These22 IRC § 151(d)(3)(A), (C). For 2004, the threshold amounts are $214,050 for married individuals filing a jointreturn, $178,350 for heads of households, $142,700 for single individuals, and $107,025 for married individualsfiling separate returns (Rev. Proc. 2003-85, 2003-49 I.R.B. 1184, § 3.16(2)).23 IRC § 151(d)(3)(B). The personal exemptions claimed are phased out over a $122,500 range ($61,250 for marriedtaxpayers filing separate returns), beginning at the applicable threshold. The sizes of the phaseout range($122,500/$61,250) are not adjusted for inflation. For 2004, the point at which a taxpayer’s personal exemptionsare completely phased out is $336,550 for married individuals filing a joint return, $300,850 for headsof households, $265,200 for single individuals, and $168,275 for married individuals filing separate returns(Rev. Proc. 2003-85, 2003-49 I.R.B. 1184, § 3.16(2)).24 EGTRRA § 102.25 IRC § 11.26 IRC § 1.27 Id.28 Id. 34