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PAYING THE NANNY TAX

        Claiming Dependents         

If your mother-in-law comes to visit and stays for weeks on end, does that mean you can claim her as a dependent?  Well, as much as you would probably like to, the short answer is "not-likely" unless you provide more than one-half of her support during the year. 

 

Claiming dependents is a topic we deal with a lot with our clients, so we have decided to address it in our newsletter so that we can clear up quite a few misconceptions.

Who you may claim as a dependent is determined by whether or not they qualify under one of five different tests that the IRS has established:

Claiming dependents is a topic we deal with a lot with our clients

 

Member of the household (or relationship)

The person must live with you for the entire year as a member of your household or must be related to you as a parent, sibling, child, grandchild, aunt or uncle, niece or nephew, or in-law.  A foster child must live with you as a member of the household for the entire year to qualify as a dependent.

Citizenship

Any person you claim as a dependent must be either a US citizen or a resident of the US, Canada or Mexico for at least some part of the calendar year.  Foreign exchange students typically would not qualify as dependents because they are neither citizens nor residents of the US.  However, if you are providing sole support for your parents residing in Mexico, they would qualify as dependents.

Gross income

Unless the individual you are wanting to claim as a dependent is your child and under age 19 (or 24 in the case of a student), he or she cannot earn more than $3,950 (in 2015) during the year.  Unfortunately, the IRS considers gross income to be all money, property and services received which are not tax exempt and is considered regardless of offsetting expenses.

So, for example, using the case of your mother-in-law above, if she comes to live with you as her sole means of support, but leases out her condo at $400 per month, you most likely will not be able to claim her as your dependent.  Her gross income for the year will be $4,800 regardless of the expenses she incurs maintaining the condo for her lessee.  

On the brighter side, however, since her social security payments are most likely exempt from tax, that income would not be considered as part of her gross income.  If she sells the condo, you may be able to claim her as a dependent regardless of her social security income.  

Joint return

Even if all other tests are met, you cannot take a dependent exemption for an individual who files a joint return in most cases.  Even if you provide all of the support for your mother-in-law using the case above as an example once more, and she has no other income, but files a joint return with her spouse, you would be prohibited from listing her as a dependent.

Support

Generally, you must provide more than half the support (which includes food, clothing, housing, medical and education and other costs) for any person you plan to claim as a dependent during the calendar year.  Your percentage of support can be determined by comparing it to the support the individual received from all other sources.

In the instance when no one provides more than half the support for a person (several children supporting an aged parent for example), but the person would qualify as a dependent on all other tests, then anyone who provides more than 10% of the support can claim the exemption provided an agreement is reached with the other parties providing support.  Only one person, however can claim the exemption and the others must sign a written statement agreeing not to claim the exemption.  The written statement must be attached to the return of the person claiming the dependent.

Divorced or separated parents have a special set of rules for determining dependent deduction.  But generally, the parent who has custody of the child for the greater part of the year is treated as the parent who provides more than half of the child's support.  

This is true whether or not the custodial parent actually provided more than half the support.  A custodial parent may sign a statement promising not to claim the exemption for the child.  It should be attached to the tax return of the noncustodial parent claiming the exemption. 

Please give us a call is you have questions regarding a potential dependent.  In "close" situations, there is some tax planning that you can do in this area.

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