Liberty Tax Service Basic Income Tax Course CLASS TWO

Chapter 1 Homework HOMEWORK 1: Use the appropriate Filing Requirement Table to determine who has to file. Yes or No. Ed’s filing status is single and in 2008 he was 54 years old. His gross income was $8,440 and he has withholding of $450. N (But he should because taxes have been withheld) Jane’s filing status is qualifying widow(er) with dependent child. She was 42 years old in 2008 and her gross income was $13,350. N Dick and Sally’s filing status is married, joint return. Dick was 68 and Sally was 61 years old in 2008. Their gross income was $17,820 N Sam’s filing status is head of household. He was 29 years old in 2008 and his gross income was $11,550. Y Terry (single, age 17 in 2008) is claimed as a dependent by her parents. Her gross income was $5,550. Y Rufus (age 70 in 2008) is single and his son can claim him as a dependent. His only income was $2,250 in bank interest. Y

Chapter 1 Homework HOMEWORK 1: Use the appropriate Filing Requirement Table to determine who has to file. Yes or No. Sonia (age 67 in 2008) is single, received nontaxable social security of $9,000 and made $750 net from selling Christmas ornaments at craft shows. Y Barbara (single, age 16 in 2008) can be claimed by her parents as a dependent. In 2008, Barbara earned wages of $480 as a dishwasher and $620 from her job as a clerk. She also had a savings account, which earned interest of $300. N Barry (single, age 17 in 2008) can be claimed by his parents as a dependent. In 2008, Barry earned wages of $5,150 working at a fast food restaurant and he had no other income. N Jackie was married in 2008 but chose the filing status married, separate return. In 2008, she had a gross income of $3,500. Y Len and Marge (ages 69 and 70 in 2008) will file a married joint return. Len received wages of $10,500 and Marge received a taxable pension of $7,000. They had a joint bank account, which paid them interest of $2,000 and Marge received $2,500 social security. N Lorna (age 23 in 2008) is married but can be claimed as a dependent by her parents. Her earned income (wages) in 2008 was $5,550. Y

Chapter 1 Homework HOMEWORK 2: None of the following taxpayers can be claimed as a dependent. What is the gross income level at which each must file a return? Married (living together), joint return, both age 65 in 2008. $20,000 Married (living together), joint return, both age 63 in 2008. $17,900 Head of household, age 65 in 2008. $12,850 Qualifying Widow(er) with dependent child, age 64 in 2008. $14,400 Single, age 23 in 2008. $8,950 Married, separate return, age 65 in 2008. $3,500 Single, turned age 65 on January 1, 2009. $10,300 Married (living together), joint return, one spouse age 67 and one spouse age 58 in 2008. $18,950 Head of household, age 19 in 2008. $11,500 Single, age 87 in 2008. $10,300

Chapter 1 Homework HOMEWORK 3: Joshua S. Scott, (344-55-6677, born 3/16/1959) is single and lives at 1566 Piney Road, Mason City, IA 50401. He is a steel worker and his Form W-2 follows. He has no other income. Prepare a 2008 return for him.

Chapter 2: EXEMPTIONS AND DEPENDENTS Chapter Content Personal Exemptions Dependent Exemptions Five Qualifying Child Tests Four Qualifying Relative Tests Exemption Phase-out Key Ideas Objectives Understand the Types of Exemptions Define the Qualifying Child Tests Define the Qualifying Relative Tests Understand the Phase-out of Exemptions Helpful Hints: 1. Define the terms personal exemption and exemption for dependents. Show students the exemption section of Form 1040 Alert students that someone must claim “0” exemptions if they are being claimed as a dependent by another person.

EXEMPTIONS Exemptions reduce taxable income. Two types of exemptions: Personal exemptions Exemptions for dependents. Dollar amount adjusted each year for inflation. The exemption amount for 2008 is $3,500. Each person claimed as an exemption must have a valid social security number or other valid taxpayer identification number. Exemptions reduce taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. The dollar amount is adjusted each year for inflation. The exemptions amount for 2007 is $3,400. Each person claimed as an exemption must have a valid social security number or other valid taxpayer identification number.

EXEMPTIONS Form 1040 Page 1

PERSONAL EXEMPTIONS Generally, ONE exemption can be claimed for yourself unless you can be claimed as a dependent by someone else. Rules for your spouse: Never considered your dependent. Can claim ONE exemption for your spouse if filing MFJ. If filing MFS, you can claim ONE exemption for your spouse only if spouse has no gross income, filed no tax return, and was not the dependent of another taxpayer. If you are divorced or legally separated by the end of the tax year, you cannot claim former spouse as exemption. If spouse died during the year, you can generally claim the exemption for deceased spouse. Generally, ONE exemption can be claimed for yourself unless you can be claimed as a dependent by someone else. Rules for your spouse: Your spouse is never considered your dependent. You can claim one exemption for your spouse if filing MFJ. If filing, MFS, you can claim ONE exemption for your spouse only if spouse has no gross income, filed no tax return, and was not the dependent of another taxpayer. If you are divorced or legally separated by the end of the tax year, you cannot claim former spouse as exemption. If your spouse died during the year, you can generally claim the exemption for deceased spouse.

EXEMPTIONS FOR DEPENDENTS You are allowed ONE exemption for each person you can claim as a dependent. The term dependent means a qualifying child or a qualifying relative. ONE exemption is allowed for each person you claim as a dependent if the person is either your qualifying child or qualifying relative, and they meet the three tests for claiming a dependent. Table 2-1 provides an overview of the rules for claiming an exemption for a dependent.

RULES FOR CLAIMING A DEPENDENT Dependent Taxpayer Test Person cannot claim a dependent if they can be claimed as a dependent by another person. A person filing a joint return and their spouse can be claimed as a dependent by someone else cannot claim any dependents on their return. Joint Return Test Generally you cannot claim a married person as a dependent if he or she files a joint return. Unless the joint return is being filed only to claim a refund and not tax liability would exist for either spouse on separate returns. Citizen or Resident Test A person cannot be claimed as a dependent unless that person is a U.S. citizen, U.S. resident, U.S. national, or a resident of Canada or Mexico, for some part of the year. You can claim an exemption for a qualifying child or qualifying relative only if three tests are met: (1) Dependent taxpayer test; (2) Joint return test; (3) Citizen or resident test You cannot claim a dependent if they can be claimed as a dependent by another person. If you are filing a joint return and your spouse can be claimed as a dependent by someone else you cannot claim dependents on your joint return.

JOINT RETURN TEST – PROBLEM 1 Slade’s son and his wife each had less than $3,500 of wages and no unearned income. Neither is required to file a tax return. Taxes were taken out of their pay, so they filed a joint return to get a refund. Is Slade disqualified from claiming their exemptions just because they filed a joint return? Yes or No?

JOINT RETURN TEST – PROBLEM 1 Slade’s son and his wife each had less than $3,500 of wages and no unearned income. Neither is required to file a tax return. Taxes were taken out of their pay, so they filed a joint return to get a refund. Is Slade disqualified from claiming their exemptions just because they filed a joint return? No Slade is not disqualified from claiming their exemptions just because they filed a joint return.

QUALIFYING CHILD The FIVE TESTS must ALL be met for a child to be your qualifying child. The five tests are: Relationship Age Residency Support Special test for qualifying child of more than one person

QUALIFYING CHILD Relationship Test (Test 1) Person must be your son, daughter, stepchild, eligible foster child, or a descendant of any of them, or brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of any of them. An adopted child is always treated as your own child. The term adopted child includes a child who was lawfully placed with you for legal adoption. An eligible foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. To meet the relationship test, a person must be your son, daughter, stepchild, eligible foster child, or a descendant of any of them, or brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them. An adopted child is always treated as your own child. The term adopted child includes a child who was lawfully placed with you for legal adoption. An eligible foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

QUALIFYING CHILD Age Test (Test 2) Person must be under age 19 at the end of the year. A full-time student under age 24 at the end of the year (To qualify, your child must be a student during some part of each of any 5 calendar months of the year). Permanently and totally disabled at any time during the year, regardless of age. To meet the age test, a person must be under age 19 at the end of the year, or A full-time student under age 24 at the end of the year (To qualify, your child must be a student during some part of each of any 5 calendar months of the year and they do not have to be consecutive months), School Defined. A school can be an elementary school, junior and senior high school, college, university, or technical, trade, or mechanical school. However, an on-the-job training course, correspondence school, or internet school does no count as a school. Permanently and totally disabled at any time during the year, regardless of age.

AGE TEST – PROBLEM 2 Beth’s son turned 19 on November 30. He was not disabled or a full-time student. Does he meet the age test? Yes or No?

AGE TEST – PROBLEM 2 Beth’s son turned 19 on November 30. He was not disabled or a full-time student. Does he meet the age test? No Beth’s son does not meet the age test because at the end of the year he was not UNDER age 19.

QUALIFYING CHILD Residency Test (Test 3) Person must have lived with you for more than half of the year. Exceptions apply for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents. A person is considered to have lived with you during periods of time when you, or both, are temporarily absent due to special circumstances such as illness, education, business, vacation, or military service. A child who was born or died during the year is treated as having lived with you all year if your home was the child’s home the entire time he or she was alive during the year. Person must have lived with you for more than half of the year. Exceptions apply for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents. A person is considered to have lived with you during periods of time when you, or both, are temporarily absent due to special circumstances such as illness, education, business, vacation, or military service.

QUALIFYING CHILD Residency Test (Test 3) A child will be treated as a qualifying child of his or her noncustodial parent if all of the following apply. The parents are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement, or lived apart at all times during the last 6 months of the year. The child received over half of his or her support for the year from the parents. The child is in the custody of one or both parents for more than half of the year. A decree or separate maintenance or written separation agreement that applies to 2008 provides that the noncustodial parent can claim the child as a dependent or the custodial parent signs a written declaration (such as Form 8332) that he or she will not claim the child as a dependent for the year. Person must have lived with you for more than half of the year. Exceptions apply for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents. A person is considered to have lived with you during periods of time when you, or both, are temporarily absent due to special circumstances such as illness, education, business, vacation, or military service.

RESIDENCY TEST – PROBLEM 3 Charles and Ellen Roper are divorced. Ellen has custody of their child, Erika. They both provide all the support for their daughter. Ellen is giving Charles the exemption for Erika. What form must Charles must attach to his return? Form 8879 Form 8332 Form 8453

RESIDENCY TEST – PROBLEM 3 Charles and Ellen Roper are divorced. Ellen has custody of their child, Erika. They both provide all the support for their daughter. Ellen is giving Charles the exemption for Erika. What form must Charles must attach to his return? Form 8332

QUALIFYING CHILD Support Test (Test 4) To meet this test, the child cannot have provided more than half of his or her own support for the year. This test is different from the support test to be a qualifying relative, which is described later. The child cannot have provided more than half of his or her own support for the year.

QUALIFYING CHILD Special Test for qualifying child of more than one Person (Test 5) 1. If a child meets the relationship, age, residence, and support test to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child. 2. If you and the other person cannot agree on who will claim the child and more than one person files a return with the same child, the IRS will disallow all but one of the claims using the tie-breaker rules. Note: If your qualifying child is not a qualifying child for anyone else, this test does not apply to you. If a child meets the relationship, age, residence, and support test to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child.

QUALIFYING CHILD Table 2-2. When More Than One Person Files a Return Claiming the Same Qualifying Child (Tie-Breaker Rule) Caution. If a child is treated as the qualifying child of the noncustodial parent under the rules for children of divorced or separated parents, see Applying this special test to divorced or separated parents. IF more than one person files a return claiming the same qualifying child and . . . THEN the child will be treated as the qualifying child of the. . . only one of the persons is the child's parent, parent. two of the persons are parents of the child and they do not file a joint return together, parent with whom the child lived for the longer period of time during the year. two of the persons are parents of the child, they do not file a joint return together, and the child lived with each parent the same amount of time during the year, parent with the higher adjusted gross income (AGI). none of the persons are the child's parent, person with the highest AGI.

Applying this special test to divorced or separated parents. QUALIFYING CHILD Applying this special test to divorced or separated parents. If a child is treated as the qualifying child of the noncustodial parent under the rules for divorced or separated parents described earlier, the noncustodial parent can claim an exemption and the child tax credit for the child. But the noncustodial parent cannot claim the child as a qualifying child for head of household filing status, the credit for child and dependent care expenses, or the earned income credit. Make sure students understand custodial vs noncustodial and how the child can and cannot be claimed by each parent.

If the child is the qualifying child of more than one other person, ONLY one of those persons can claim the child as a qualifying child for head of household filing status, the credit for child and dependent care expenses, and the earned income credit. No other person can claim any of these three tax benefits unless he or she has a different qualifying child. If you and any other person file a return claiming the child as a qualifying child for any of these tax benefits, the IRS will disallow all but one of the claims using the tiebreaker rule in Table 2-2.

QUALIFYING RELATIVE The FOUR TESTS must ALL be met for you to claim an exemption for a person to be your qualifying relative. The four qualifying relative tests are: 1. NOT a qualifying child test, 2. Member of household or relationship test, 3. Gross income test, and 4. Support test.

QUALIFYING RELATIVE Not a Qualifying Child Test (Test 1) A child cannot be your qualifying relative if the child is your qualifying child or the qualifying child of any other taxpayer. Example: Your 2-year-old son lives with your parents and meets all the tests to be their qualifying child. He is not your qualifying relative. A child cannot be your qualifying relative if the child is your qualifying child or the qualifying child of anyone else.

Qualifying Relative Not a Qualifying Child Test (Test 1) An individual is not a qualifying child of “any other taxpayer” if the individual’s parent (or other person with respect to whom the individual is defined as a qualifying child): Is not required to, and does not, file an income tax return, or Files an income tax return solely to obtain a refund of withheld income taxes

Qualifying Relative Not a Qualifying Child Test (Test 1) Example: Jack is single and supports as members of the household his girlfriend Mary, and Mary’s 3-year-old daughter. Mary and her daughter lived all year with Jack. Mary has no gross income and she is not required to file an income tax return. Because Mary does not have a filing requirement and did not file an income tax return, Mary’s daughter is not treated as a qualifying child of Mary or any other taxpayer, and Jack may claim the child as his qualifying relative, provided all other requirements are met.

QUALIFYING RELATIVE Member of Household or Relationship Test (Test 2) A person must either live with you all year as a member of your household, or be related to you in one of the ways listed below who do not have to live with you. a. If the person is your child, stepchild, eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister, father, mother, grandparent, stepfather, stepmother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law or a descendent of these they do not have to live with you as a member of your household. b. An eligible foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. c. A cousin meets this test only if he or she lives with you all year as a member of your household. d. A person does not meet this test if at any time during the year the relationship between you and that person violates local law. A person must either live with you all year as a member of your household, or be related to you in one of the ways listed on the next slide who do not have to live with you.

QUALIFYING RELATIVE Gross Income Test (Test 3) To meet this test, a person’s gross income for the year must be less than $3,500. Gross income is all income in the form of money, property, and services that is not exempt from tax.

QUALIFYING RELATIVE Support Test (Test 4) You must provide more than half of the total support for the person to meet this test except for multiple support and children of divorced or separated parents. Total support includes amounts spent for food, lodging, clothing, education, medical and dental care, medical insurance premiums, recreation, transportation, and similar necessities. You must provide more than half of the total support for the person to meet this test except for multiple support and children of divorced or separated parents. Total support includes amounts spent for food, lodging, clothing, education, medical and dental care, medical insurance premiums, recreation, transportation, and similar necessities. In order to be a qualifying relative, the more they pay for their own support, the more difficult it becomes to meet the support test. If they money that they contribute goes to items that are not considered to be support, the money available for support is less. For example, if your dependent invests or saves part of his/her income, it may become easier for you to demonstrate that you are providing over half of his/her total support.

QUALIFYING RELATIVE Support Test (Test 4) 3. State benefit payments like welfare, food stamps, and housing are considered support provided by the state, not by the parent, regardless of how the parent actually spends the money. a. In the case of multiple support, no one person provides more than half of the individual’s support, but two or more people together do. You can agree that any one of you who individually provided more than 10% of the individuals support can claim the exemption. The other contributors must sign a statement agreeing not to claim the exemption for that year. b. In most cases of divorced and separated parents a child will be the qualifying child of one of the parents. However, if the child does not meet the requirements to be a qualifying child of either parent, the child may be a qualifying relative of one of the parents. In that case follow the rules for divorce and separated parents. You must provide more than half of the total support for the person to meet this test except for multiple support and children of divorced or separated parents. Total support includes amounts spent for food, lodging, clothing, education, medical and dental care, medical insurance premiums, recreation, transportation, and similar necessities. In order to be a qualifying relative, the more they pay for their own support, the more difficult it becomes to meet the support test. If they money that they contribute goes to items that are not considered to be support, the money available for support is less. For example, if your dependent invests or saves part of his/her income, it may become easier for you to demonstrate that you are providing over half of his/her total support.

SUPPORT TEST - PROBLEM 4 Your mother received $2,400 in social security benefits. She also received $300 in interest which she put into her savings account. She paid $2,000 toward the rent and $400 for recreation. The total rent was $2,820 and you paid all of her food expenses ($1,395). Do you pass the Support Test? Yes or No?

SUPPORT TEST - PROBLEM 4 Your mother received $2,400 in social security benefits. She also received $300 in interest which she put into her savings account. She paid $2,000 toward the rent and $400 for recreation. The total rent was $2,820 and you paid all of her food expenses ($1,395). Do you pass the Support Test? No Your mother’s total expenses were $4,615 (rent, food & recreation). She paid $2,400 and you only paid $2,215 ($820 and $1,395) which is less than half. Recreation expenses are allowable support expenses.

SUPPORT TEST - PROBLEM 5 Darlene spent $2,400 for food, clothing, and shelter for her 26-year-old son Bill. She received $3,000 from welfare for her son. Can she claim a dependency exemption for her son? Yes or No?

SUPPORT TEST - PROBLEM 5 Darlene spent $2,400 for food, clothing, and shelter for her 26-year-old son Bill. She received $3,000 from welfare for her son. Can she claim a dependency exemption for her son? No. The $3,000 from welfare is more than half of Bill’s total support of $5,400. Darlene cannot claim a dependency exemption for her son because she did not provide more than half of Bill’s support.

QUALIFYING RELATIVE Support Test (Test 4) Tax-exempt income, savings, and borrowed amounts used to support the person do figure Into total support. Support may also include furniture, appliances, and cars if they are bought for the person’s own use. Calculate lodging using the fair rental value if there was no rent actually collected. The fair rental value is the amount you could reasonably expect a stranger to pay for the same kind of lodging.

QUALIFYING RELATIVE Fair Rental Value Calculation Your parents live rent free in a house you own. It has a fair rental value of $5,400 a year furnished, which includes a fair rental value of $3,600 for the house and $1,800 for the furniture. This does not include heat and utilities. The house is completely furnished with furniture belonging to your parents. You pay $600 for their utility bills. Utilities are not usually included in rent for houses in the area where your parents live. Therefore, you consider the total fair rental value of the lodging to be $6,000 ($3,600 fair rental value of the unfurnished house, $1,800 allowance for furnishings provided by your parents, and $600 cost of utilities) of which you are considered to provide $4,200 ($3,600 + $600).

QUALIFYING RELATIVE Support Test (Test 4) Total support does NOT include income taxes paid by the person for his/her own income, social security and Medicare taxes paid by the person from his/her own income, life insurance premiums, funeral expenses, scholarships to your child if a full-time student, and Survivors and Dependents Educational Assistance payments used for support of the child who receives them.

Did you provide more than half the support? QUALIFYING RELATIVE Determining Total Support Don and Donette Davids want to claim Donette’s mother, Shirley Doubting, as their dependent. Shirley lived with the Davids for the entire year. She received social security payments of $4,200 and earned $800 in interest on her savings account, which had a balance of $20,000 at the beginning of 2008. She put $300 of her social security into her savings account and also kept the $800 interest in her account. The Davids’ monthly household expenses included: Fair rental value of home $720 Food 400 Utilities and phone 180 They also paid the following for Shirley: Beauty salon $1,400 Clothing $550 Doctor bills 300 Cosmetics 180 Travel 250 Entertainment 500 Gifts 450 Did you provide more than half the support? Yes or No?

Yes Ask students to turn to page 2-13

QUALIFYING RELATIVE Support Test (Test 4) There are two exceptions to the support test: Multiple support Children of divorced or separated parents In the case of MULTIPLE SUPPORT, no one person provides more than half of the individual’s support, but two or more people together do. You can agree that any one of you who individually provides more than 10% of the individual’s support (but only ONE) can claim the exemption if the other tests are met. The other contributors must sign a statement agreeing not to claim the exemption for that year. The person who claims the exemption must keep these signed statements for their records. A multiple support declaration identifying each of the others who agreed not to claim the exemption must be attached to the return of the person claiming the exemption. Form 2120, Multiple Support Declaration, can be used for this purpose. In the case of multiple support, no one person provides more than half of the individual’s support, but two or more people together do. You can agree that any one of you who individually provided more than 10% of the individuals support can claim the exemption. The other contributors must sign a statement agreeing not to claim the exemption for that year.

SUPPORT TEST - PROBLEM 6 Donald and Dennis Farrow each provide 30 percent of the support of their father, Milo. Milo provides the rest of the support. Donald can claim the exemption for his father if Dennis signs a statement agreeing not to claim an exemption for Milo. True or False?

SUPPORT TEST - PROBLEM 6 Donald and Dennis Farrow each provide 30 percent of the support of their father, Milo. Milo provides the rest of the support. Donald can claim the exemption for his father if Dennis signs a statement agreeing not to claim an exemption for Milo. True. Donald keeps the statement with his records and submits Form 2120 with his return. They will alternate years they claim their Father as an exemption.

QUALIFYING RELATIVE Support Test for Children of Divorced or Separated Parents A child will be treated as being the qualifying relative of his or her non-custodial parent if all of the following apply: The parents: Are divorced or legally separated under a decree of divorce or separate maintenance. Are separated under a written separation agreement. Lived apart at all times during the last 6 months of the year. The child received over half of his or her support for the year from the parents. The child is in the custody of one or both parents for more than half of the year. A decree of divorce or separate maintenance or written separation agreement that applies to 2008 provides that the noncustodial parent can claim the child as a dependent (and, in the case of a pre-1985 agreement, the noncustodial parent provides at least $600 for the support of the child during the year) or the custodial parent signs a written declaration (such as Form 8332) that he or she will not claim the child as a dependent for the year. In most cases of divorced and separated parents a child will be the qualifying child of one of the parents. However, if the child does not meet the requirements to be a qualifying child of either parent, the child may be a qualifying relative of one of the parents. In that case follow the rules for divorce and separated parents.

PHASEOUT OF EXEMPTIONS The amount you can claim as a deduction for exemptions is PHASED OUT once your adjusted gross income (AGI) goes above a certain level for your filing status. You must reduce the dollar amount of your exemptions by 2% for each $2,500, or part of $2,500 ($1,250 for MFS) that your AGI exceeds the level for your filing status. However, you can lose no more than 1/3 of the dollar amount of your exemptions. In other words, each exemption cannot be reduced to less than $2,333. The amount you can claim as a deduction for exemptions is phased out once your adjusted gross income goes above a certain level for your filing status. You must reduce the dollar amount of your exemptions by 2% for each $2,500, or part of $2,500 ($1,250 for MFS) that your AGI exceeds the level for your filing status.

EXEMPTIONS AND DEPENDENTS KEY IDEAS Rules for claiming an exemption for a dependent You cannot claim any dependents if you, or your spouse if filing jointly, could be claimed as a dependent by another taxpayer. You cannot claim a married person who files a joint return as a dependent unless that joint return is only a claim for refund and there would be no tax liability for either spouse on separate returns. You cannot claim a person as a dependent unless that person is a U.S. citizen, U.S. resident, U.S. national, or a resident of Canada or Mexico, for some part of the year. You cannot claim a person as a dependent unless that person is your qualifying child or qualifying relative.

EXEMPTIONS AND DEPENDENTS KEY IDEAS Qualifying Child The child must be your son, daughter, stepchild, eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them. The child must be under age 19 at the end of the year under age 24 at the end of the year and a full-time student, or any age if permanently and totally disabled. The child must have lived with you for more than half of the year. The child must not have provided more than half of his or her own support for the year. If the child meets the rules to be a qualifying child of more than one person, you must be the person entitled to claim the child as a qualifying child.

EXEMPTIONS AND DEPENDENTS KEY IDEAS Qualifying Relative 1. The person cannot be your qualifying child or the qualifying child of any other taxpayer. 2. The person either (a) must be related to you in one of the ways listed under relatives who do not have to live with you, or (b) must live with you all year as a member of your household. 3. The person’s gross income for the year must be less than $3,500. 4. You must provide more than half of the person’s total support for the year.

EXEMPTIONS AND DEPENDENTS CLASSWORK 1: Using the Rules for Dependency, (1) Tracey spent $3,300 for food, shelter, and clothing for her four-year-old daughter. She received $2,900 from welfare for her daughter. Is the support test met for a qualifying child? (2) Phil’s son, Tony, earned $3,550 last year. Tony is 21 years old and started college in September 2008. Is the age test for a qualifying child met? (3) Joanne’s daughter, Adrienne, earned $3,550 last year. Adrienne is 20 years old and not in school. Can Joanne claim Adrienne as a dependant? (4) Curly provided all of the support of his father, Larry, who lived with him all year. Larry’s only income is $3,600 of interest and social security of $1,200. Can Curly claim Larry as a dependent? (5) Can Myra claim a person with a gross income of $3,500 as a qualifying relative? (6) Fred lives with his girlfriend Sue and her six-year-old child Amy. Fred provides over half of the support for Amy and both Sue and Amy lived all year with Fred. Sue has no income and she has not signed a Form 8332 allowing the noncustodial parent to claim Amy. Can Amy be Fred’s qualifying child? If not, can Fred claim her as a qualifying relative? Daughter did not provide more than half of own support Needs to be a student for 5 months. Does not meet gross income test for Qualifying Relative Less than $3,400 Does not meet relationship test. Sue is not required to file a tax return so if Amy meets the other tests she can be claimed as Fred’s qualifying relative.

EXEMPTIONS AND DEPENDENTS CLASSWORK 1: Using the Rules for Dependency, (1) Tracey spent $3,300 for food, shelter, and clothing for her four-year-old daughter. She received $2,900 from welfare for her daughter. Is the support test met for a qualifying child? YES (2) Phil’s son, Tony, earned $3,550 last year. Tony is 21 years old and started college in September 2008. Is the age test for a qualifying child met? NO (3) Joanne’s daughter, Adrienne, earned $3,550 last year. Adrienne is 20 years old and not in school. Can Joanne claim Adrienne as a dependant? NO (4) Curly provided all of the support of his father, Larry, who lived with him all year. Larry’s only income is $3,600 of interest and social security of $1,200. Can Curly claim Larry as a dependent? NO (5) Can Myra claim a person with a gross income of $3,500 as a qualifying relative? NO (6) Fred lives with his girlfriend Sue and her six-year-old child Amy. Fred provides over half of the support for Amy and both Sue and Amy lived all year with Fred. Sue has no income and she has not signed a Form 8332 allowing the noncustodial parent to claim Amy. Can Amy be Fred’s qualifying child? NO If not, can Fred claim her as a qualifying relative? YES Daughter did not provide more than half of own support Needs to be a student for 5 months. Does not meet gross income test for Qualifying Relative Less than $3,400 Does not meet relationship test. Sue is not required to file a tax return so if Amy meets the other tests she can be claimed as Fred’s qualifying relative.

EXEMPTIONS AND DEPENDENTS CLASSWORK 2: True or False. (1) The custodial parent can sign an agreement allowing the noncustodial parent to claim an exemption for their child. (2) The support test for qualifying child states that the child cannot have provided over half of his/her own support. (3) Every person claimed as a dependent must have a social security number or other valid taxpayer identification number. (4) You can never take an exemption for your dependent if he/she files a joint return. (5) The custodial parent can sign a statement releasing the child’s exemption to the noncustodial parent. The written declaration can only release the exemption for one year. (6) A technical school does not meet the school definition for the age test for qualifying child. (7) If your filing status is MFS, you can always claim an exemption for yourself and one for your wife. (8) Temporary absences due to special circumstances do not prohibit someone from being a member of your household.

EXEMPTIONS AND DEPENDENTS CLASSWORK 2: True or False. (9) If your spouse died during the year, you cannot claim their exemption. (10) The custodial parent is the parent with whom the child lived the greater part of the year. (11) An eligible foster child meets the relationship test for qualifying child. (12) If two people together contribute more than half an individual’s support, they both can claim the exemption. (13) You can use entertainment costs in calculating total support for a person. (14) A person must live with you over half the year as a member of your household or be related to you in one of the ways listed in “relatives who do not have to live with You all year”, to meet the member of household or relationship test for qualifying relative. (15) To meet the citizenship test, a person must be a U.S. citizen for the entire year.

EXEMPTIONS AND DEPENDENTS CLASSWORK 2: True or False. (16) A household member who dies during the year meets the member of household test for qualify relative. (17) Gross income includes money, property, tax-exempt income, and services. (18) A person related to your spouse is not considered to meet the relationship test for you once you are divorced. (19) If your child is 24 years old and a full-time student with a gross income of $3,500, you cannot claim an exemption for that child. (20) To qualify for the gross income test for a qualifying relative, your 27-year-old child must earn less than $3,500.

EXEMPTIONS AND DEPENDENTS CLASSWORK 2: True or False. (1) The custodial parent can sign an agreement allowing the noncustodial parent to claim an exemption for their child. T (2) The support test for qualifying child states that the child cannot have provided over half of his/her own support. T (3) Every person claimed as a dependent must have a social security number or other valid taxpayer identification number. T (4) You can never take an exemption for your dependent if he/she files a joint return. F (5) The custodial parent can sign a statement releasing the child’s exemption to the noncustodial parent. The written declaration can only release the exemption for one year. F (6) A technical school does not meet the school definition for the age test for qualifying child. F (7) If your filing status is MFS, you can always claim an exemption for yourself and one for your wife. F (8) Temporary absences due to special circumstances do not prohibit someone from being a member of your household. T

EXEMPTIONS AND DEPENDENTS CLASSWORK 2: True or False. (9) If your spouse died during the year, you cannot claim their exemption. F (10) The custodial parent is the parent with whom the child lived the greater part of the year. T (11) An eligible foster child meets the relationship test for qualifying child. T (12) If two people together contribute more than half an individual’s support, they both can claim the exemption. F (13) You can use entertainment costs in calculating total support for a person. T (14) A person must live with you over half the year as a member of your household or be related to you in one of the ways listed in “relatives who do not have to live with You all year”, to meet the member of household or relationship test for qualifying relative. F (15) To meet the citizenship test, a person must be a U.S. citizen for the entire year. F

EXEMPTIONS AND DEPENDENTS CLASSWORK 2: True or False. (16) A household member who dies during the year meets the member of household test for qualify relative. T (17) Gross income includes money, property, tax-exempt income, and services. F (18) A person related to your spouse is not considered to meet the relationship test for you once you are divorced. F (19) If your child is 24 years old and a full-time student with a gross income of $3,500, you cannot claim an exemption for that child. T (20) To qualify for the gross income test for a qualifying relative, your 27-year-old child must earn less than $3,500. T

EXEMPTIONS AND DEPENDENTS CLASSWORK 3: Complete a dependency support form and determine if the taxpayers can claim the exemption. Frank (SSN 110-24-9330) and Gloria Stephens (SSN 234-56-7890) live at 397 Westend Rd., Nashville, TN 37203. Gloria’s father, Mr. James (SSN 012-45-1213) lived with them for all of 2008. He is a widower and a U.S. citizen. Mr. James received $4,000 in social security and earned $920 in interest in his savings account, which had a balance of $23,000 at the beginning of 2008. He saved $800 of these social security payments and also saved his interest earnings. The remaining money was spent for his support. Frank and Gloria also have a 3-year-old daughter living with them. They figured the fair rental value of their home was $700 per month. Other monthly expenses included $650 for food and $210 for utilities. Mr. James’ other expenses for the year were as follows: Clothing $ 405 Medical/dental expenses 1,150 Travel 500 Gifts 400 Dry cleaning 75 Entertainment 500 Cosmetics 180 Hair cuts 130 Fill in a dependency support chart and determine whether Mr. James meets the dependency tests.

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