The Motley Fool Previous Page Dependents - An Overview

By Roy Lewis

Confused about your dependent deductions? Well, let's talk about dependents for a few minutes.

You are able to reduce your taxable income for each dependent you claim on your return, regardless of whether you itemized deductions. Most dependents are clearly identifiable, but there may be some twists.

The floor is open for questions... I see the first hand over there in the corner.

Q: This one is easy. A dependent is somebody who lives with you, right?

A: Not exactly. For someone to be claimed as a dependent, they must meet all five of the following tests:

  1. Support Test
  2. Gross Income Test
  3. Citizenship Test
  4. Joint Return Test
  5. Member of Household or Relationship Test
Q: OK, so what is the support test?

A: To meet the support test, you must:
  1. provide more than 50% of the person's total financial support, or
  2. 2) provide more than 10% of the person's total financial support if you share that responsibility with others. The total shared support must be more than 50% of the person's total financial support.
Q: What are some items that are included as support?

A: Support includes things such as food, lodging, clothing, education, medical and dental expenses, recreation, transportation, and other necessities.

Q: Does my mortgage payment qualify as support?

A: No, the fair rental value of the lodging, not the mortgage payment, is classified as support. The fair rental value is the amount the dependent would have been required to pay on the open market for comparable lodging.

Q: How about student loans and scholarships?

A: Student loan proceeds used for education and living expenses are considered to be support provided by the individual responsible for repayment of the loan. Scholarships received by a dependent who is a full-time student for at least five months during the year are not considered support.

Q: Who should pay close attention to the support qualifications?

A: Many parents whose children have substantial other income care very much about these qualifications. We are primarily talking about college students with outside income. Every year, I have clients whose support is tracked very closely so that the dependency exemption is not lost to the parents. Most people can easily meet the support test, but for many others the support question is very difficult to answer. The other concern is the child who may have a substantial custodial account or trust account. You've got to be careful that you don't blow your dependent exemption by having the child receive too much income from these financial vehicles in the early years.

Q: My two sisters and I support our mother who lives alone on a small pension. Who claims the dependent exemption?

A: I alluded to this situation above, but now we'll address it in detail. As long as you and your sisters together provide more than 50% of your mother's total financial support and each sister provides at least 10% of her total financial support, and all of the other tests are met, you can decide among yourselves who will claim the dependent.

Use IRS Form 2210, "Multiple Support Declaration," signed by each of you, and attach it to the return of the one who will claim the dependent. In such cases, the dependent exemption usually floats from person to person annually. But, depending on your tax status and the tax status of your sisters, there are some tax-planning opportunities available.

Q: What is the gross income test?

A: The amounts change every year, but for 2000, a person must have less than $2,800 of gross income to be claimed as a dependent. (See Tax Topic 354 - Dependents on the IRS website for updated information on the gross income limitation amount.)

Q: Huh? My son works part-time and makes more than $2,800 in wages. Would he meet the gross income test?

A: If your son is under the age of 19 at the end of the tax year or is a full-time student under the age of 24, you are allowed an exemption if he meets the other dependency tests. The gross income test does not apply to children under 19 or full-time students under age 24.

Q: My daughter is in college and she is over 19. She also earns more than $2,800 in wages from her part-time job. Would she meet the gross income test?

A: If your daughter is under 24 and was a full-time student during at least five months of the year, you are allowed an exemption if she meets the other dependency tests.

Q: My son is "finding himself" right now. He is 20 years old, lives at home, doesn't attend school, and earns about $3,000 from his part-time job. Certainly he must be a dependent?

A: He sounds very dependent!! But, I hope he "finds himself" before you go broke, because you will not be allowed an exemption for him as a dependent on your tax return. Why? Because he fails the gross income test. He's over age 19