Be Careful When Claiming Dependents on Tax Returns
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 website at http://www.irs.gov
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.