Tax Tips
Qualifying for the Dependency Exemption - March 2004
Richard Scrivanich - Partner
In light of the fact that most of you will be filing your 2003 income tax returns in the next few months, I thought you may find a quick review of the rules for claiming someone as a dependent helpful.
A five-part test applies, as follows:
1. Support: The first part is the support requirement, under which you must provide more than 50% of the individual’s support for the year. Support is measured by amounts spent for the individual’s support and by the value of support items provided. For example, say $6,000 is spent on the support of an individual who lives in your home. You provide $2,500 of the $6,000. Assume as well that the rental value of the housing you provide is $2,000 for the year. Under these facts, the total support for the individual is $8,000 (the $6,000 actually spent plus the value of the housing provided), and you have provided $4,500 ($2,500 in cash expenses plus the housing). Thus, you would meet the support test.
“Support” includes the cost or value of basic needs such as food, clothing, shelter, insurance, education, etc., but isn’t limited to “necessities” in a narrow sense of the term. IRS says “recreation” is a necessity and the Tax Court takes an expansive view, including such costs as summer camp and a daughter’s wedding.
A scholarship received by a full-time student and applied toward his education is not considered support if the individual is your child. So, for example, if you cover $4,000 out of $6,000 of a child’s support costs and he receives a $10,000 college tuition scholarship, you can still claim him as your dependent. Total support is not increased to $16,000 by the scholarship.
The other four parts of the test are simpler:
2. Relationship or member of household: The individual must either be a relative of yours or a member of your household. The list of qualifying relatives is fairly broad, including parents, grandparents, children, grandchildren, siblings, aunts and uncles (blood relations), and nephews and nieces. Children-, parent- and siblings-in-law qualify as well, as do stepchildren and parents. An adopted child or foster child can also qualify.
If your potential dependent is a “distant” relative, please call and I’ll determine if he or she can qualify under the tax guidelines.
3. Gross income: The individual cannot have gross income equal to or above the exemption amount ($3,050 in 2003). Importantly, however, this test doesn’t apply to children who are under 19 at the end of the year, or who are under 24 and are full-time students during at least five months of the year (thus, a college senior graduating in May or June can qualify in the year of graduation).
4. Joint-return: The individual you are seeking to claim as your dependent cannot be filing a joint return for the year. However, if the only reason a joint return is filed is to get a refund and no return is otherwise required, this test is satisfied.
5. Citizenship: The individual must be a U.S. citizen or resident. Residents of Canada and Mexico can also qualify. The dependent exemption isn’t allowed unless you include the dependent’s social security number on your return. This rule applies even to a newborn dependent child. That means that to get the dependency exemption for the year the child is born you have to get a social security number for the child in time to include the number on your return.
Having someone qualify as your dependent doesn’t always result in tax savings. From the dependent’s standpoint, he loses his personal exemption on his own return and may be limited to a smaller standard deduction than non-dependent taxpayers. However, you cannot avoid these negatives simply by “electing” not to claim the dependent. To avoid them you would have to fail one of the above tests, e.g., adjust the amount of support you provide so it fails to exceed 50% of the total.
Additionally, from your standpoint, if your adjusted gross income (AGI) exceeds a certain amount, the tax benefits of the exemption are reduced (eliminated at the highest AGI levels). This reduction starts when AGI is over $209,250 for married couples filing jointly in 2003; the figure is $174,400 for taxpayers who qualify as head of household.
Last, special rules regarding the exemption for a child apply where the parents are divorced or separated. Please let me know if you need information on this element of the issue or if you’d like to discuss any aspects of this topic further.
If you have any questions related to this tax tip, or any other tax matter, please give me a call at (562) 698-9891.
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