From the Patrick Parker Realty Tax Season Blog Series:
12 Tricky Tax Dependent Dilemmas: Questions & Answers
Claiming dependents on your tax return can make a big difference in what you pay in taxes (or how big a refund you get). Each child you can claim as a dependent on your 2014 tax return knocks $3,950 off your taxable income, saving $988 in the 25 percent bracket. But children aren’t the only ones you can claim as dependents.
Despite attempts by the IRS to clarify whether or not someone qualifies as a dependent, today’s complex living arrangements often raise questions as to just whom can be claimed on your tax return.
There are now two classes of people who can qualify as dependents:
- Qualifying children
- Qualifying relatives
See how the IRS defines dependents.
The following Q&As can also help clear up the confusion about who can and cannot be claimed as a dependent:
Birth of a Child
Q. The rules say a qualifying child must live with you for more than half the year. My daughter was born in October. Does that mean I have to wait until next year to claim her?
A. No. Even a child born on December 31 qualifies as a dependent and earns the full $3,900 exemption. The same rule applies if a child dies during the year. A child who is born or dies during the year is treated as having lived with you all year long.
Living Together I
Q. My girlfriend and I live together. She doesn’t have a job, so I pay for the rent and all the groceries. Can I claim her as my dependent?
A. Perhaps, if she meets the requirements for a qualifying relative. That means you must have lived together all year long, her gross income must be less than $3,900, and you must have provided more than half of her support. One other test: Your living arrangements must not violate local law. The IRS notes, for example, that some states prohibit couples from living together if one party is married to someone else. In such a case, the IRS says, a dependency exemption would be disallowed even if the other requirements are met.
Living Together II
Q. My girlfriend and her two-year-old son live with me and I basically pay all the expenses. Can I claim both of them as my dependents?
A. Yes, if they meet all the IRS requirements for dependents. Did they live with you all year long? Did you provide more than half of their support? Did either of them have gross income of less than $3,900? If you can answer YES to all three questions, then you may claim both your girlfriend and her son as your dependents. (This assumes your living arrangements don’t violate local law. See above.) Until recently, in this situation the boyfriend could not claim the child as a qualifying relative because the child was considered a qualifying child of the mother. However, the IRS now says if the parent’s income is so low that he or she doesn’t have to file a tax return, then the boyfriend who lives with the mother and child all year long can claim the child as a dependent.
Boomerang Children I
Q. After our 28-year-old daughter’s divorce, she and her two young children moved back in with me and my wife. Can we claim all three of them as dependents on our tax return?
A. The answer depends on how much money your daughter made in 2014. If she made less than $3,950 and you provided more than half of her support for the year, then she can be claimed as your dependent as a qualifying relative. The same rules apply to your grandchildren. If your daughter made more than $3,950, she doesn’t qualify as your dependent, but the grandkids might because they can be qualifying children for both you and your daughter. If your daughter agrees to let you claim the children as your dependents, and her Adjusted Gross Income (AGI) is less than yours —assuming doing so will save the family money if you’re in a higher tax bracket—then you may claim them. In that case, of course, your daughter could not claim them. If your daughter’s AGI is greater than yours then she can claim the grandchildren but you cannot.
Boomerang Children II
Q. Our 25-year-old son is back home after completing his college degree. He has a pretty good job, so he makes too much for us to claim him as a dependent. However, we’ve heard that there’s a way he can claim his 16-year-old sister as a dependent, since we all live together in the same house. Is that really possible?
A. The answer is maybe – depending on your income and your son’s. In order for your son to claim his sister as a dependent, his adjusted gross income (AGI) must be higher than any parent who could also claim her as a dependent, regardless of whether you choose to claim her or not. This is called a “tiebreaker” rule, which helps determine who, if anyone, can claim a dependent. Remember, only one person can claim the dependent in any given tax year.
Children of Divorced Parents
Q. My divorce was final last year, and the three kids live with me. Now my ex says that since he’s paying child support, he’s going to claim them as dependents on his return. He says that means I can’t claim them on mine. Is that true?
A. Not unless your divorce decree gives him that right. Since the general rule for qualifying children demands that the child live with you more than half the year, children of divorced parents are usually dependents of the custodial parent. There are exceptions. The custodial parent can release the exemption to his or her ex-spouse by signing a written declaration (Form 8332) that the noncustodial spouse must attach to the tax return each year he or she claims the children as dependents. Or if your divorce decree gives your ex-spouse the right to claim the children, he can do so if he attaches key pages of that document to his tax return. Otherwise, you get to claim the children as your dependents. If your ex-spouse claims them, too, the IRS will step in and likely deny his claim.
Adult Child in Need
Q. Our 30-year-old son has fallen on hard times. Because he lost his job, my spouse and I are basically supporting him, paying rent on his apartment and sending him money for food. Can we claim him as a dependent?
A. Although he’s too old to be your qualifying child, he may qualify as a qualifying relative if he earned less than $3,950 in 2014. If that’s the case and you provided more than half of his support during the year, you may claim him as a dependent.
Q. My 83-year-old mother moved in with me when she could no longer live alone. Her only income is her Social Security, so she doesn’t have to file a tax return. Can I claim her as my dependent?
A. Yes, assuming you provide more than half of her support, she can pass the test as a qualifying relative. Tax-free Social Security benefits don’t count as gross income for the $3,900 test. When figuring that portion of her support you provide, include a value for the housing you provide. If someone else helps support your mother—one of your brothers or sisters, for example—and your combined support passes the 50 percent threshold, you may claim your mother as a dependent if you file a Form 2120: Multiple Support Agreement.
RELATED: Taxes After the Death of A Spouse
Child with Scholarship
Q. My daughter won a full-ride scholarship to an expensive college. I’m thrilled, but I think the value of the tuition is more than what it costs me to feed and clothe the young scholar. If I don’t provide more than half of support, do I lose her as a dependent?
A. Don’t worry. First, scholarships are specifically excluded when figuring support. And remember, the test for a qualifying child is no longer that you provide more than half the support, but that she does not provide more than half of her own support. You can still claim her, assuming she’s under age 24.
Child of Separated Parents
Q. My wife and I separated at the end of September. Our 15-year-old son lived with me in October and with his mother the rest of the year. We’ll be filing married-filing-separate returns this year. Who gets to claim our son as a dependent?
A. It’s up to you and your wife. You might decide that the parent who gets the biggest tax benefit (the one in the higher tax bracket) should claim the exemption. If you can’t agree, however, the exemption goes to your wife because your son lived with her for more of the year than he lived with you.
Q. My boyfriend and I live together with our 3-year-old son. Since we’re not married, we can’t file a joint return. Which one of us gets to claim our son as a dependent
A. It’s up to you. Since he qualifies as a qualifying child for each of you, either parent may claim the child as a dependent. If you can’t decide, the exemption goes to whichever of you reports the higher Adjusted Gross Income on your separate tax return.
Child Receives Inheritance
Q. Our 17-year-old received a $100,000 inheritance from his uncle last year. Does that mean we can’t claim him as a dependent on our 2014 return?
A. Not unless he splurged on an expensive car, a lavish trip, or otherwise spent a lot of the money on his own behalf. When it comes to the qualifying child tests, it doesn’t matter how much money a child receives during the year (from work, a gift or inheritance). What matters is if he provides more than half of his own support. Any money he saved doesn’t count toward going toward his support, so you can probably still claim him as your dependent.
Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.
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The Blog Series will cover many topics such as How do I qualify for a home seller break?, How do I qualify for a home buyer break?, Do I have to report the home sale on my return?, What is the gain on the sale of my home?, What Are Home Renovation Tax Credits?, Deducting Mortgage Interest, Taking the First-Time Homebuyer Credit, How to Avoid Taxes on Canceled Mortgage Debt, Tax Incentives as they relate to Life’s biggest transitions, such as Marriage, the Birth of a Baby, Divorce, or the death of a Spouse and much more. New posts in this Blog Series will be published twice weekly.
For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.