Dependency Exemptions

Objectives Determine if a taxpayer can claim an exemption for a dependent by applying applicable dependency test. Determine how many exemptions a taxpayer can claim for dependents.

Qualified Dependents A dependent is either a qualifying child or a qualifying relative. Both have unique rules. If a taxpayer can claim another person as a dependent, the dependent cannot take a personal exemption on their tax return. Refer to Tables 1 & 2 in pgs C-4 & C-5 of Publication 4012

Check Your Knowledge John is a 23-year-old single college student. His mother is entitled to claim him as a dependent on her tax return. Is John entitled to claim himself as a personal exemption on his own return?

Answer NO Why? If a taxpayer can be claimed as a dependent on another person's tax return, that taxpayer cannot take the personal exemption, even if the other person does not claim the exemption.

Check Your Knowledge True or False? Jennifer Rawls, an 18 year old single mother who can be claimed as a dependent by her parents, can claim her infant son as a dependent on her own tax return.

Answer FALSE Why? A person who is claimed as a dependent on someone else's return cannot claim a dependency exemption on their own return.

Brenda, a taxpayer, adopted a child named Franco, who is not a U.S. citizen. Franco began living with Brenda in May of the tax year. Does he meet the citizen or resident test? True or False

Answer False Why? Franco would meet the citizen or resident test only if he was a member of Brenda's household for the ENTIRE year.

Qualifying Child Tests: Relationship Test Age Test Residency Test Support Test, AND Qualifying Child of More than One Person Test

Relationship Test To meet this test, the child must be: The taxpayer's son, daughter, stepchild, eligible foster child (placed by an authorized placement agency), or a descendant of any of them (i.e., your grandchild) of any of them. The taxpayer's brother, sister. half brother, half sister. stepbrother, stepsister, or a descendant (for example, niece or nephew) of any of them. Step 5 ( Refer to Table 1 pg C-4 Publication 4012 ) Was the child your son, daughter, stepchild, eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (i.e., your grandchild, niece, or nephew)? If NO, this child is not your qualifying child. Go to Table 2—Dependency Exemption for Qualifying Relative Interview Tips. If YES, go to Step 6. Note: An adopted child is treated as your child.

Age Test Step 6 ( Refer to Table 1 pg C-4 Publication 4012 ) Was the child: Under age 19 at the end of the year and younger than you (or your spouse, if filing jointly)? OR A full-time student under age 24 at the end of the year and younger than you (or your spouse, if filing jointly)? OR Permanently and totally disabled at any time during the year? If NO, this child is not your qualifying child. Go to Table 2. If YES, go to Step 7. Note: A permanently and totally disabled person cannot engage in any substantial gainful activity due to a physical or mental condition and a doctor has determined the condition has lasted or can be expected to last continuously for at least a year or can lead to death. To meet this test, the child must be: Under age 19 at the end of the tax year and younger than the taxpayer (or the taxpayer's spouse, if filing jointly), or A full-time student under the age of 24 at the end of the year and younger than the taxpayer (or spouse, if filing jointly), or Any age if permanently and totally disabled at any time of the year

Residency Test Step 7 ( Refer to Table 1 pg C-4 Publication 4012 ) Did the child live with you as a member of your household, except for temporary absences, for more than half of the year? (Answer "Yes" if the child was born or died during the year.) If NO, this child is not your qualifying child. Go to Table 2—Dependency Exemption for Qualifying Relative Interview Tips and see footnote for Step 7, if applicable. If YES, go to Step 8. (Use Table 3 to see if the exemption for children of divorced or separated parents or parents who live apart applies.) To meet this test, the child must: Have lived with the taxpayer for more than half the year. The taxpayer's home is any location where they regularly live; it does not need to be a traditional home. For example, a child who lived with the taxpayer for more than half the year in one or more homeless shelters meets the residency test. Note: A taxpayer may NOT claim a dependency exemption for a housekeeper, other household employee, or a stillborn child.

Exceptions to Residency Test There are a few exceptions to the residency test such as: The child is considered to have lived with the taxpayer during periods of time when either the child or the taxpayer is temporarily absent due to illness, education, business, vacation or military service. A child who was born (or died) during the year is treated as having lived with the taxpayer all year, if the child lived in the taxpayer's home for the entire time he or she was alive.

Support Test Step 8 ( Refer to Table 1 pg C-4 Publication 4012 ) Did the child provide more than half of his or her own support for the year? If NO, go to Step 9. If YES, you cannot claim this child as a dependent. To meet this test, the child cannot: Have provided more than half of his or her own support during the tax year. This test is different from the support test for qualifying relative. A person's own funds are not support unless they are actually spent for support. If the taxpayer is unsure whether the child provided more than half of his or her own support, review the Worksheet for Determining Support in the Volunteer Resource Guide (Tab C) together.

Test Your Knowledge Doris, a U.S. citizen, is 8 years old and had a small role in a television series. She made $60,000 during the tax year, but her parents put all the money in a trust fund to pay for college. She lived with her parents all year. Does she meet the support test?

Answer YES Why? Doris meets the support test since the $60,000 in earnings were not used for her own support. Since she meets the tests for a qualifying child, she can be claimed as a dependent by her parents.

Test Your Knowledge What if Doris, an 8-year-old actress, earned $60,000 during the tax year, but her parents used the money to provide for household expenses: would she meet the support test?

Answer NO! Why? Doris would fail the support test because she provided more than half of her own support.

Qualifying Child of More Than One Person Test Step 9 ( Refer to Table 1 pg C-4 Publication 4012 ) Is the child a qualifying child of any other person? If NO, you can claim this child as a dependent. If YES, you must be the person entitled to claim the child as a qualifying child. Go to the chart, Qualifying Child of More Than One Person. Although a child could meet the conditions to be the qualifying child of more than one person, only one taxpayer can claim the child as a qualifying child for the following tax benefits (exception: if the special rule for children of divorced or separated parents or parents who live apart applies): Dependency exemption Child tax credits Head of Household filing status Credit for child and dependent care expenses Exclusion from income for dependent care benefits Earned income credit

To determine which taxpayer can treat the child as a qualifying child and claim the benefits, apply these rules: If only one of the taxpayers is the child's parent, the child is the qualifying child of the parent. If both taxpayers are the child's parents and they do not file a joint return together, either one can claim the child. If both claim the child, IRS will treat the child as the qualifying child of the parent with whom the child lived for the longer period of time in If the child lived with both parents the same amount of time, IRS will treat the child as the qualifying child of the parent who had the higher Adjusted Gross Income (AGI) for 2011.

Continued… If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest AGI for If a parent can claim the child as a qualifying child but no parent does, the child is treated as the qualifying child of the person who had the highest AGI for the year, but only if that person's AGI is higher than the highest AGI of any of the child's parents who could claim the child. If the parents file a joint return together, this rule allows the parents to divide their combined AGI equally (between themselves).

Qualifying Relative Tests: Not a Qualifying Child Test Member of Household OR Relationship Test Gross Income Test, AND Support test

Not a Qualifying Child Test Step 1 ( Refer to Table 2 pg C-5 Publication 4012 ) Is the person your qualifying child or the qualifying child of anyone else? A child is not the qualifying child of any other taxpayer if the child's parent (or any other person for whom the child is defined as a qualifying child) is not required to file a U.S. income tax return or files an income tax return only to get a refund of income tax withheld. If YES, the person is not a qualifying relative. (See Qualifying Child Interview Tips.) If NO, go to Step 2. A child is not considered the taxpayer's qualifying relative if the child is the taxpayer's qualifying child, or is the qualifying child of another taxpayer. However, there is an exception to this statement. A child may qualify as the taxpayer's dependent under the tests for qualifying relative, even if the child is the qualifying child of another taxpayer. This is allowed only when the child's parent (or other person for whom the child is a qualifying child) is not required to file a U.S. income tax return and either: Does not file a return, or Only files to get a refund of income tax withheld or estimated tax paid

Member of Household or Relationship Test Step 2 ( Refer to Table 2 pg C-5 Publication 4012 ) Was the person your son, daughter, stepchild, foster child, or a descendant of any of them (i.e., your grandchild)? OR Was the person your brother, sister, or a son or daughter of either of them (i.e., your niece or nephew)? OR Was the person your father, mother, or an ancestor or sibling of either of them (i.e., your grandmother, grandfather, aunt, or uncle)? OR Was the person your stepbrother, stepsister, stepfather, stepmother, son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in- law, or sister-in-law? If NO, go to Step 3. If YES, go to Step 4. Note: The relatives listed in Step 2 are considered "Relatives who do not have to live with you."

If Answered No to Step 2 Step 3 ( Refer to Table 2 pg C-5 Publication 4012 ) Was the person any other person (other than your spouse) who lived with you all year as a member of your household? If NO, you cannot claim this person as a dependent. If YES, go to Step 4. Note: There are exceptions for kidnapped children; a child who was born or died during the year; certain temporary absences—school, vacation, medical care, etc.

Member of Household or Relationship Test Summary Member of Household Test To meet this test, the person must either: Live as a member of the taxpayer's household all year. OR Relationship Test To meet this test, the person must either: Related to the taxpayer as: Child, stepchild, foster child or a descendant of any of them Siblings, step-siblings Parents, step-parents, grandparent or other direct ancestor, but not foster parent Niece or nephew Aunt or uncle In laws Relationships established by marriage are not ended by death or divorce. An unrelated person who lived with the taxpayer for the entire year can also meet the member of household or relationship test.

Test Your Knowledge Tom Brown supports his wife's uncle Jim who lives in another city. The Browns file a joint return. Can the Browns claim Jim as a dependent if all other tests are met?

Answer YES Why? Because Jim is related by blood to Mrs. Brown, he meets the member of household or relationship test (as described in Step 2 of the interview tips). Uncle Jim does not have to live with the Browns.

Gross Income Test Step 4 ( Refer to Table 2 pg C-5 Publication 4012 ) Did the person have gross taxable income of less than $3,700 in 2011? If NO, you cannot claim this person as a dependent. If YES, go to Step 5. To meet this test: The dependent's gross income for the tax year must be less than the personal exemption amount ($3,700 for the 2011 tax year). Gross income is all income in the form of money, property, and services that is not exempt from tax. Remember this test applies only to qualifying relatives, not to qualifying children. For purposes of this test, the gross income of an individual who is permanently and totally disabled does not include income for services the person performs at a sheltered workshop.

Test Your Knowledge Randy's son, Paul, is not a qualifying child. Paul earned $6,800 from a part-time job. Does he meet the gross income test for a qualifying relative?

Answer NO! Why? Paul does not meet the gross income test because his total income exceeds $3,700.

Support Test Step 5 ( Refer to Table 2 pg C-5 Publication 4012 ) Did you provide more than half the person’s total support for the year? If YES, you can claim this person as your qualifying relative dependent. If NO, go to Step 6. To meet this test: The taxpayer must have provided more than 50% of the person's total support for the tax year. Note that this support test is different from the support test for a qualifying child.

True or False The gross income test considers taxable income only, whereas the support test considers all of the dependent's income - both taxable and nontaxable.

Answer TRUE Why? The gross income test considers all taxable income in the form of money, goods, property, and services. The support test considers taxable income as well as nontaxable income including borrowed amounts like student loans and Social Security benefits, among other examples.