A personal exemption is a threshold of income that is not taxable to you, and it is subtracted from your total income in computing the amount that is taxable. One personal exemption is allowed for you and everyone in your family.
Back when the income tax laws were conceived, Congress wanted to exempt from tax the amount someone would need to eke by. When the first income tax was enacted in 1894 (later declared unconstitutional), the personal exemption was set at $4,000. When our present-day system of taxation was enacted in 1913, the personal exemption for a married person was set at $4,000. And when you file your 2015 tax return, guess how much you can claim as an exemption – $4,000! So much for eking by. Fortunately, these days the personal exemption increases each year for inflation, so at least the disparity won’t get any worse. The personal exemption you can claim in 2016 is $4,050.
You can claim a personal exemption for yourself, and if you file jointly, your spouse can claim a personal exemption on the same tax return. You can also claim personal exemptions for your children. If they are not your biological children, they must be related to you in some way, such as a stepchild, adopted child, brother, sister, niece, nephew – you get the idea.
In addition, to be claimed as a dependent, a child has to be under age 19 unless permanently and totally disabled, or if 19 or older, must be a full-time student for at least five months of the year and be under the age of 24.
But wait, there’s more. The child must be a dependent and not self-supporting, and must live with you unless living with the other parent in the case of divorce or separation or temporary absence, such as being away at school.
And in addition, the child must be a US citizen, US national or a resident of the United States, Canada or Mexico during the year.
And yet one more requirement: you have to list the child’s social security number on your tax return.
If you support your parents or other relatives, you may be able to claim a dependency exemption for them, if their taxable income is less than $4,000 for 2015 (this amount goes up every year). You can also claim non-relatives that you support if they were members of your household and meet those same requirements.
Source: What is the Personal Exemption?