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Federal Employees and Retirees:
Be Careful When Claiming Dependents on Tax Returns
Edward A. Zurndorfer, Certified Financial Planner
As federal employees and retirees prepare to file their 2009 federal and state
income tax returns, they should make sure that they can legitimately claim tax
dependents. As is discussed below, the IRS is currently focusing in particular
on dependents being claimed by more than one taxpayer.
A dependency exemption can be claimed only by the person
entitled to the exemption. A dependent such as a child cannot claim an exemption
for himself or herself even if the person entitled to claim the exemption -- in
most cases, a parent -- does not claim the child or receives no tax benefit from
the exemption.
In general, to claim a dependent exemption the individual
claiming the exemption must provide more than half of the dependent's support.
One family relative who is never considered a dependent is a spouse. This is
because an exemption for a spouse is based on marital relationship and not
support. But if spouses file their tax returns as married filing separately and
one spouse has no gross income and is not a dependent on anyone else's return,
then the spouse with income may claim the non-income spouse as an
exemption.
The following dependents are listed as exemptions
on lines 6a -6c on Form 1040:
• children who lived with the taxpayer parent during the
year;
• children who do not live with the taxpayer parent due
to divorce or separation. If any such dependents are reported on lines 6a - 6c,
then Form 8332, Release/Revocation of Release of Claim to Exemption for Child by
Custodial Parent, or other supporting documents may be required; and
• dependents including children who did not live with the
taxpayer parent during the year but the parent provided more than half of the
child's support; also, dependents who are not the taxpayer's children - for
example, a parent not necessarily living with a child but the child fully
supports - in that case, the child could claim the parent as a
dependent.
Three IRS tests determining the legitimacy of the
dependent exemption
The Internal Revenue Code (IRC) formally classifies a
dependent as either a "qualifying child" or a "qualifying relative". Regardless
of whether an individual is claiming a qualifying child or a qualifying relative
as a dependent, there are three tests the IRS uses in determining the legitimacy
of the dependent exemption, namely:
- Dependent taxpayer. An individual cannot claim another
person as a dependent if that person she can be claimed as a dependent by
another individual;
- Joint returns. A married person who files a joint return
cannot be claimed as a dependent of another individual; or
- Citizenship. To be a dependent, the person must be a
United States citizen, resident alien, natural citizen or a resident of Canada
or Mexico.
A "qualifying child" is an individual who meets the
following tests: (1) relationship; (2) age; (3) residency; (4) support; (5)
joint return; (6) "younger than" and (7) "tie breaker" test, if more than one
taxpayer claims the qualifying child.
• Relationship test. The qualifying child must be the
biological child, adopted child, eligible foster child (placed by an authorized
placement agency or by judgment decree, or other court orders), grandchild,
brother, sister, stepbrother, stepsister, or descendent of any such
relative.
• Age test. Generally, the qualifying child must be under
age 19 (under age 24 if a full-time student) as of the close of the tax
year.
• Residency test. The qualifying child must live in the
same principal place of residence as the taxpayer for more than half of the tax
year.
• Support test. The qualifying child cannot have provided
for more than half of his or her support.
• Joint return. The qualifying child cannot file a joint
return with a spouse unless filing a joint return was done only to secure a tax
refund.
• "Younger than" test. The qualifying child must be
younger than the individual claiming the child.
• "Tie breaker" rules. It is possible that a child is the
qualifying child of more than one person. If that occurs, the individuals
claiming the child can decide between themselves who will claim the qualifying
child as a dependent. If they cannot agree and more than one person files a
return claiming the same child, then IRS-imposed "tie breaker" rules apply to
determine which individual can claim the child (IRS Notice 2006-86).
The "younger than" and the "tie breaker" rules
effectively eliminate the ability of a child (living with a parent) to claim a
sibling also living at home on the child's tax return. An individual is not
required to pay more than half the cost of maintaining the home in order to
claim a child as a qualifying child dependent. The only "support rule" that
applies for a qualifying child is that the child does not provide more than half
of his or her own support.
The Working Family Tax Relief Act of 2004 (WFTRA) - in
addition to changing the definition and to eliminating inconsistencies with
respect to dependents - also created another type of dependent known as a
"qualifying relative." A "qualifying relative" includes parents, children who
are not "qualifying children" and even people who are not related to the
individual claiming that person as a dependent.
To claim a qualifying relative as a dependent, the
qualifying relative must not be a qualifying child and must satisfy five
tests:
• Relationship test. In addition to the relatives listed
above, a qualified relative includes parents, grandparents, step-parents,
bothers and sisters of parents, father-, mother-, sister-, brother-, son-,
daughter-in-laws, or anyone who is a member of the individual's household for
the entire year.
• Support test. The individual (claiming the dependent)
provided more than half of the qualified relative's support for the
year.
• Gross income test. The qualified relative's gross
income could not exceed $3,650 during 2009. The gross income includes taxable
income, unemployment compensation, taxable scholarships, fellowships and grants.
Gross income does not include tax-exempt income such as municipal bond
interest.
• Citizenship test. See above under "qualifying child"
tests.
• Joint return test. See above under "qualifying child"
tests.
It is important to note that even if a child does not
satisfy the "qualifying child" rules, the child may satisfy the "qualifying
relative" rules, as the following example illustrates:
Joseph graduated from high school three years ago and is
21 years old. He is neither going to school nor employed full-time. He lives
with his father Paul. Since Joseph is not a full time student and is over 18
years old, he is not a "qualifying child." But he meets the rules of a
"qualifying relative." Paul is therefore able to claim Joseph a
dependent.
The IRS has greatly increased its compliance efforts in
the area of dependency exemption deductions. In particular, the IRS is focusing
on dependents being claimed by more than one individual. The compliance program
as currently administered could lead to an IRS Notice of Deficiency being sent
to an individual incorrectly claiming a dependent exemption.
Four different IRS notices will require an individual's
response. Failing to respond will result in the IRS disallowing the dependency
exemption on the return. A sample of such notices sent to individuals includes
the following:
• "Please help confirm your dependent
exemption and that you are eligible for the exemption of another individual on
your return."
• "Please confirm that you are eligible to claim an
exemption for yourself on your return."
• "Confirm that an exemption can be claimed for a
dependent on your return as the same individual was claimed on another
return."
• "Your dependent claiming himself on his return and you
will need to document that you are in fact eligible to claim that individual on
your return."
More information on dependents may be found in
IRS Publication 501; Exemptions, Standard Deductions, and
Filing Information and in IRS Publication 929, Tax Rules for Children
and Dependents. Both publications may be downloaded from the IRS
website at http://www.irs.gov
About the Author
Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in
Silver Spring, MD. He is a seminar speaker at federal employee retirement
seminars throughout the country for the National Institute of Transition
Planning, Inc. , and an author of numerous publications on federal employee
benefits.
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