Dependents - An Overview

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Dependents - An Overview

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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 and not a full-time student.

Q: I support my father who lives in Canada. Would he meet the citizenship test?

A: Yes. The dependent must be either a U.S. citizen, resident, or national; or a resident of either Canada or Mexico. But, if you are supporting your mother who is a foreign citizen and resident of a country other than Canada or Mexico, she will not qualify as a dependent, even if all of the other tests are met, because she fails the citizenship test.

Q: My daughter is only 18 years old and got married in December. She lived with us for the entire year, but says she wants to file a joint return with her new husband. Now what?

A: Well, the joint return test states that no exemption may be claimed for a dependent who files a joint return. But, there is an exception. If the joint return is filed: (a) only to claim a refund of tax withheld; and (b) if neither spouse is required to file; and (c) no tax liability would exist for either spouse if separate returns were filed, then a joint return can be filed and the dependent exemption can still be claimed. The exception is very narrow, but it can sometimes work. Too bad you couldn't talk her into a January wedding.

Q: What is the member-of-household or relationship test?

A: To meet this test, the dependent must:

1) live in your household for the entire year, or
2) be "closely" related to you.

Therefore, persons closely related to you do not have to live in your household to meet the test.

Q: Who are closely related persons?

A: Wschoooooo (TMF Taxes taking a deep breath)... child, grandchild, great-grandchild, adopted child, stepchild, brother or sister, half brother or half sister, brother-in-law or sister-in-law, stepbrother or stepsister, father or mother, grandparent, father-in-law or mother-in-law, stepfather or stepmother, aunt or uncle, niece or nephew, son-in-law or daughter-in-law.

Q: I have my father-in-law living in my home. Or, at least he used to be my father-in-law. He is really my ex-husband's father. Since my ex and I are now divorced, would he still qualify?

A: Yes... any of the above relationships that were established by marriage are not ended by death or divorce.

Q: My mother-in-law lived with my wife and me in 2000, but she died in early January 2001. Would she still qualify as a dependent for 2001?

A: Yes, again... a person who dies during the year and was a member of the household until death still meets the member-of-household test. In addition, a child who was born and died during the year still meets the test.

OK, students... class dismissed. The dependent tests can get even more complicated than this. So, if you have any additional questions, you can always check out IRS Publication 501. And, if you have even more questions, be sure to ask 'em in the Tax Strategies discussion board.
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