Rules For Taking A Dependency Exemption

It would seem that the issue of whether a person can be a dependent on your 1040 would be a fairly simple issue.  However, that is not the case.  The IRS has some very precise rules regarding who may be claimed as a dependent and the circumstances under which they may be claimed.

The first test that must be met for any person to be claimed as a dependent is the citizenship or resident test.  This test simply states that the person being claimed as a dependent must be a United States citizen or a resident of the United States, Canada, or Mexico for some part of the year.  A non-resident may not be claimed as a dependent regardless of the support you provide or your relationship to that person.

Additionally, the person being claimed as a dependent cannot be claimed by another taxpayer and the person cannot file a joint return (unless there is no tax liability and the filing is only to obtain a refund).

Once that test is met, the person must qualify as a dependent under one of two paths.  They may be a qualifying child or a qualifying relative.  In addition, there are special rules for children of divorced or separated parents.

There are four tests that must be met to be a qualifying child. All four must be met in order to be claimed as a dependent.

The relationship test  requires that the person being claimed as a dependent be your son, daughter, stepchild, foster child, brother, sister (including half and step brothers and sisters) or a descendent of any of them.  Therefore, your grandchild as well as your niece or nephew would also qualify.

The age test states that the child 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.  Note that the date of determination is December 31.  A child turning 19 at any time during the year who is not a full time student does not qualify.

A child is defined as a full-time student if he or she is a full-time student as defined by the institution for part of five months during the year.

There is an exception to the age rule for permanently and totally disabled children.  They would qualify regardless of age.

The residency test requires that the child must have lived with you for more than half the year.  Temporary absences, such as for illness, education, vacation, business, or military service count as time lived with you.  A child who is born or dies during the year is treated as having lived with you for the entire year if they were alive at any time during the year.

The support test is met if the child did not provide more than half of his or her own support during the year.  Scholarships are not considered support provided by the child.

In the case of separated or divorced parents, the custodial parent is usually considered the one who qualifies for the exemption.  The custodial parent may sign a written declaration that he or she will not claim the exemption and is allowing the noncustodial parent to take the exemption.  Additionally, if there is a qualified domestic relations order specifying who gets the exemption, the IRS will normally abide by that order.

If the would-be dependent does not meet the criteria for a qualifying child, it may be possible to claim the person as a qualifying relative.  This is somewhat of a misnomer, as the person does not have to be a blood relative to qualify under these rules.  Additionally, there is no age limit for meeting the qualifying relative criteria.

The first test is that the person cannot be a qualifying child of any other taxpayer.

The member of household or relationship test has two sections.  First, the person must live with you as a member of your household for the entire year.  As with the residency test under qualifying child, temporary absences for specified reasons count as living with you.    Second, there is an exception.  Certain relatives do not have to live with you to qualify under this test.  These include your child, stepchild, foster child or any descendent of them; your brother or sister (including half and step); your parents or other direct ancestor; aunt, uncle, niece, or nephew.  Any of these relationships that were established by marriage are not ended by death or divorce.

The gross income test specifies that the person’s gross income for the year be less than the amount of the dependency exemption.  For 2010, this is $3,650.  Gross income is “all income in the form of money, property, and services that is not exempt from tax.”  Thus, income such as social security is not included in gross income for this purpose.

Finally, the support test requires that you provide over half the person’s support during the year.  If no one provides over half the support, those supporting the person may enter into a multiple-support agreement under which one person is designated as having permission to claim the dependency exemption.

I would add that there is one other specification under the IRS rules.  In order to claim the dependency exemption, the relationship between the parties must not be in violation of state or local law.  For example, if a person has multiple wives, state laws against polygamy would serve to prevent the husband from claiming multiple wives as dependents.

Hopefully, this has shed some light on the topic of dependency exemptions.  It is by no means exhaustive, as there are an unlimited number of situations that do not always fit the rules perfectly.

Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.

Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.

He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.

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