There is more to qualifying as a dependent than “Who’s your daddy?”

“Who’s your daddy?” may be commonly used as a boastful claim of dominance over the another person, but it doesn’t always carry weight with the IRS when it comes to qualifying as a dependent. I have already seen a couple situations this year where the taxpayer has provided well over one-half of the support for another person, but still did not meet all the tests for claiming that person as a dependent.

Taxpayers can claim personal exemptions on their tax returns for themselves, their spouses, and dependents under IRC Sec. 151. Certain tests must be met to claim a person as a dependent. Exemption amounts are adjusted annually for inflation; the exemption amount for 2012 is $3,800. A dependency exemption deduction is available for each person who is a dependent of the taxpayer for the year. A dependent is defined as either a qualifying child or a qualifying relative.

Qualifying Child

A qualifying child is one who meets the following five tests:

1. Relationship,

2. Age,

3. Residency,

4. Support, and

5. Tie-breaker test for qualifying child of more than one person.

Relationship Test – The child must be the taxpayer’s:

  • Son, daughter, stepchild, eligible foster child or a descendant of any of them (for example, grandchild), or Brother, sister, half-brother, half-sister, stepbrother, stepsister or a descendant of any of them (for example, niece or nephew).
  • Adopted Child. An individual legally adopted by the taxpayer or an individual lawfully placed with the taxpayer for legal adoption is treated as a child by blood.
  • Eligible Foster Child. An eligible foster child is one placed with the taxpayer by an authorized placement agency or by judgment, decree or other order of any court of competent jurisdiction and is treated as the taxpayer’s child.

Age Test – The child:

  • Must be either:
    • Under age 19 at the end of the year, or
    • Under age 24 at the end of the year and a full-time student. A full-time student is one who is enrolled full-time in school (but not online or correspondence schools) during some part of any five months of the calendar year or is pursuing a full-time course of institutional on-farm training under the supervision of an accredited agency. In Letter Rul. 9838027, the IRS allowed the taxpayer to count the month of August when a student registered on August 28 but did not start classes until September 2.
  • Can be any age if totally and permanently disabled.

Caution: The age test differs slightly when determining if a child is a qualifying child for the dependent care credit (must be under age 13 if not disabled) and the child tax credit (must be under age 17).

Residency Test – The child must have the same principal residence as the taxpayer for more than half of the tax year. Temporary absences due to special circumstances, including absences due to illness, education, business, vacation or military service, are ignored.

Support Test – The child cannot provide over half of his or her own support. A full-time student does not take into account taxable or nontaxable scholarship payments received in calculating the support test.

Tie-breaker Rules—Qualifying Child of more than one Person – It’s possible that a child is the qualifying child of more than one person. If that occurs, the taxpayers can decide between themselves who will claim the qualifying child as a dependent. If they cannot agree and more than one person files a return claiming the same child, the tie-breaker rules apply to determine which taxpayer the IRS will allow to claim the child. The tie-breaker rules are summarized in the following table.

Qualifying Child—Tie-breaker Rules

IF more than one person files a return

claiming the same qualifying child and …

THEN, the child is treated as the

qualifying child of the…

only one of them is the child’s parent, parent.
two of them are the child’s parents and they

do not file a joint return,

parent with whom the child lived the greater portion of the year.
same as above but the child lived with each

parent for the same amount of time during

the year,

parent with the highest adjusted gross   income (AGI).
none of them is the child’s parent, person with the highest AGI.

Qualifying Relative

Individuals who do not meet the tests for being a qualifying child of the taxpayer may still qualify as a dependent of the taxpayer as a qualifying relative. A qualifying relative is a person who is not a qualifying child of anyone else and who also meets the following three tests with respect to the taxpayer:

1. Member of household or relationship,

2. Gross income, and

3. Support.

Unlike a qualifying child, a qualifying relative can be any age.

Member of Household or Relationship Test.

The person must:

1. Live in the taxpayer’s household for the entire year, or

2. Be related to the taxpayer in any of the following ways:

  • Child, stepchild, eligible foster child, grandchild or great grandchild
  • Brother, sister, half-brother, half-sister, stepbrother or stepsister
  • Father, mother, grandparent or other direct ancestor (but not foster parent)
  • Stepfather or stepmother
  • Niece or nephew
  • Aunt or uncle
  • Brother-in-law, sister-in-law, father-in-law, mother-in-law, son-in-law or daughter-in law

Related persons do not need to be members of the taxpayer’s household. Also, relationships established by marriage are not ended by death or divorce.

A person who died during the year and was a member of the household until death meets the member of household test. A child who was born and died during the year meets the member of household test. A person does not meet the member of household test if at any time during the tax year the taxpayer’s relationship with the person is in violation of local law.

Gross Income Test – The person must have less than $3,800 of gross income in 2012. Gross income includes:

  • All taxable income in the form of money, property or services.
  • Gross receipts from rental property (do not reduce for taxes, repairs and other deductions).
  • For a Schedule C business, net sales minus cost of goods sold plus miscellaneous business income.
  • A partner’s share of the gross (not net) partnership income.
  • Unemployment compensation and taxable scholarships and fellowship grants.

Gross income does not include:

  • Tax-exempt income (certain social security benefits, municipal bond interest, some scholarship benefits, etc.).
  • Income earned by a totally and permanently disabled person at a sheltered workshop operated by a tax-exempt organization or government agency that provides special instruction to alleviate the disability. To be excluded, the income must be incidental to medical care and must come solely from activities at the workshop.

Support test – The support test is met if:

1. The taxpayer provided over 50% of the person’s total support for the year, or

2. No one person provided more than 50% of the person’s total support but two or more persons collectively did. The person must be a member of the household or related to each contributor whose support is counted as shared support and must pass the other dependency tests. The exemption can be claimed by any contributor who provided more than 10% of total support. Those sharing support must agree which of them will claim the exemption. Form 2120 (Multiple Support Declaration) must be signed by all contributors and filed with the claimant’s tax return.

By Don James, CPA, CFP


About Don James, CPA/PFS, CFP
Don is the Tax & Financial Planning partner with Kiplinger & Co., CPAs headquartered in sunny Cleveland, Ohio since 1982. He partners with business owners and families and specializes in goal achievement solutions, tax minimization strategies and serves in the role of gatekeeper of sound financial advice.

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