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Tag Archive for dependent exemption

The Kiddie Tax

The kiddie tax is a special tax on children under age 18 who have net investment income over $2,000. It became part of the tax law when the 1984 Tax Reform Act was signed by President Reagan. The law was designed to prevent high income taxpayers from registering investments and other property producing investment income in the name of their children and having the income reported on the child’s tax return which would be taxed at a much lower rate than the parents.

The child’s net investment income can be reported in two ways: (1) on the parents return using form 8814 or (2) on the child’s return using form 8615. If it is reported on the child’s return, the net investment income over $2,000 will be taxed at the parents highest tax rate. Read more

Penny Taxwise’s Boomerang Niece

Howdy, folks! Penny Taxwise here, back ‘atcha with another fun-filled tax adventure! Hope your Thanksgiving was loads of fun – I know Mr. Taxwise is still comatose from his turkey-induced stupor.

Today, we’ll be looking at my poor sister’s parenting conundrum and how it relates to the topic de jour: taxes, of course! Ever heard of a “boomerang kid”? It’s a new-fangled term that’s sprung from the sagging job market these days, and it refers to college grads who move back in with their parents after a failed job hunt.

Well, my sister is dealing with a slight variation on the term. Her little bundle of joy is now a woman who is (blessedly) gainfully employed. She’s working before attending college, but her job doesn’t pay enough to make ends meet. My sister, being the good mom she is, stepped up to the plate to pad my niece’s bottom line, but now sis is wondering how this will affect her own finances come tax time.

I told her not to fear – Tax Connections would come to the rescue and answer her question lickety-split. Here’s the question, just as I asked it, on the platform:

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?

Claiming Dependents – An Answer from a Pro

In no time flat, a tax pro right here on Tax Connections stepped up to the plate. Patrick O’Hara , EA answered my sister’s plea thoroughly and clearly, and she couldn’t be happier with his response.

O’Hara began by warning that questions regarding filing status and exemptions can become quite complicated in a hurry.


Simple – the right classification hinges on a variety of factors. You can find a detailed review of these stipulations in IRS Publication 501.

According to O’Hara, if my sister wants to claim her daughter as a dependent, she must be a “qualifying child” under the IRS’s definition. There are five tests the IRS sets forth which my sister can use to determine whether her daughter meets the definition – stuff like age, residency, support, and relationship. Sounds simple enough, right?

There’s also a stipulation that a dependent cannot have a joint return filed. This was easy enough – my niece is 18 and unmarried, so big check mark in that department. The next test – relationship – was a win as well since (obviously) there is a mother-daughter relationship in this case. The age requirement stipulates that the dependent in question must be under 19 or a full-time student. A win there, too – in our case, she’s 18.

The living requirement made us nervous, but luckily, in our circumstance, my niece had moved out of my sister’s house later in the year, so she just squeaked by with the residency requirement. She’d lived in the house a little over half the year. Phew.

The fourth requirement centered on the taxpayer (my sister) paying more than half of the child’s support. This one made us laugh a bit. Half!? My sister’s been footing the bill for more like three quarters of that kid’s expenses! Check mark there, too.

Finally, as we touched on earlier in this post, my niece had not previously filed a joint return (she’d have some serious explaining to do if she had). This would have been a deal-breaker, but we met this requirement as well.

Therefore, in my sister’s case – her daughter was her dependent in the eyes of the IRS. Yay! According to O’Hara:

In the case you describe, it would appear that the child is a qualifying child. 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.

This was fantastic news for my sis, and she’s currently looking into the “head of household” matter to see if she can qualify for even greater savings on this year’s tax bill.

True Boomerang Kids

This economic climate is no picnic, and having a child move back into the nest after leaving home is both emotionally and financially tumultuous for any parent. Of course, we try to do what’s best for our kids, and the government understands that (sometimes).

If you’re dealing with a boomerang kid of your very own, then take solace in the fact that you can likely claim your child on your taxes and snag that coveted dependent exemption, which will effectively reduce the amount of your taxable income by $3700 (in 2011). Now that’s enough to ease the blow of a newly-returned member of the household cranking up your thermostat and driving you wild.

In Conclusion

If you are thinking of claiming your own boomerang kid, then make sure to discuss the tax situation with your child before you file. According to O’Hara, many times a child will file a return on his or her own and (incorrectly) claim a personal exemption. This could be bad news if you claim your kids, too – it will raise red flags that may trigger you and junior for an audit.

Simply remind your kids that they cannot claim themselves if they qualify as your dependent. Nip this in the bud by suggesting that you sit down and file your taxes together when that time of year rolls around. Nothing brings people together like crunching numbers [dramatic pause for laughter].

Until next time, my tax-conscious comrades!

Making Cents Count,