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My sister's 18 year old has a job and just moved out, but she's still providing considerable monetary support for her. What are the rules surrounding my sister claiming the kid as a dependent on her taxes?

Income Tax
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Patrick O'Hara , EA
Questions on filing status and exemptions can become complicated, because proper determinations depend on a variety of factors. Detailed information may be found in IRS Publication 501.

In order to claim someone as a dependent, the individual must be a qualifying child or a qualifying relative. A qualifying child must meet 5 tests based on Relationship, Age, Residency, Support, and the child cannot have filed a Joint Return.

1. The child must be “related” to the taxpayer claiming the exemption.

2. The child must be under 19 at the end of the tax year or a full-time student under the age of 24 or permanently disabled.

3. The child must have lived with the taxpayer claiming the exemption for more than half of the year.

4. The taxpayer seeking the exemption must have paid more than half of the child’s support.

5. The child cannot have filed a joint return with another taxpayer.

In the case you describe, it would appear that the child is a qualifying child for purposes of claiming the dependent exemption, which reduces the amount of taxable income by $3700 (in 2011). The ability to claim the qualifying child may also make your sister eligible for head of household status, assuming she is not married, which provides a greater standard deduction and lower tax rates.

It is important to discuss the tax situation with the child, because often times the child will file a return on her own and claim a personal exemption, which may not be correct. The child may not claim herself if she qualifies as a dependent of another taxpayer. Often times, the child files first, and claims herself, and when the parent files and claims the child, the return is rejected by the e-file system, which then requires the return to be filed on paper with a detailed explanation and substantiation of the child being the taxpayer’s “qualifying child”.
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