When can you and when can’t you take your child as a dependent? What if your child turns 24 in 2012?

When can you and when can’t you take your child as a dependent? What if your child turns 24 in 2012?

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-292-2009 Please consult with your professional tax CPA regarding your specific circumstances!

Can you take your child’s personal exemption if you daughter or son is age 24? What if your child is 22 years of age during 2012? I hope this article helps you!

IRS claims that one of the most common errors is correctly taking the personal dependency exemption. I know that we have to watch this dependency exemption carefully because some of our clients want to know whether it is better to take or to not take their children as personal exemptions. Sometimes, we will perform “what if” scenarios and have to make sure to not take a personal exemption for a child when the child has already taken their own personal exemptions. If a CPA tax preparer is not careful, it is possible that he or she will fail to take the personal dependency exemption and the child will also fail to take his or her own exemption!! The result is the child pays more tax than he or she should have paid. Or both the parents and child will take the same personal exemption resulting in an unpleasant letter from the IRS!
Here are two examples that may fit your tax situation:
1. Jill’s son Pete is 22 years old, has gross income of $3,000 and is not a full-time student or disabled. Jill provides 70% of his support; Pete’s grandmother provides the other 30% of his support. Pete is not a qualifying child of any person because he fails the age test. Why? Because Pete is over 19 years of age and he is not a full time student for at least 5 months during the current year.

However, Pete can still qualify as Jill’s qualifying relative for 2012. Jill can take Pete as her personal dependency exemption. Pete meets the relationship test because he is Jill’s son, the gross income test because his income is less than $3,800 and the support test because Jill provides over half of his support.
2. Jill’s other child Paula was 23 years old for the entire year until December 31, 2012 when she turned 24 years of age. Paula is a full time student and has gross income of $3,801 during 2012. Paula is not disabled. Although Paula meets most of the tests of being a dependent of Jill, Jill cannot show Paula as a dependent for 2012 because Paula has income over $3,800 for 2012 and turned 24 years of age during 2012. It does not matter that Jill paid over 50% of Paula’s support. If Paula had turned age 24 on 1-1-13 and was a full time student for at least 5 months during 2012, Jill could take a dependency exemption for Paula. Or if Paula had income of under $3,800 for 2012 and Jill supported over half of Paula’s support, Jill could take the dependency exemption for Paula although Paula turned 24 in 2012.

For claiming the dependency exemption, a dependent is either a:
1) Qualifying child (if 19 or older must be a full time student for 5 months during the tax year and under 24 years of age during the tax year)
2) Qualifying relative. [IRC §152(a)]

Claiming a Dependent—Quick Reference
• A taxpayer cannot claim any dependents if he, or his spouse if filing jointly, can be claimed as a dependent by another taxpayer.
• The person claimed as a dependent must be:
1) Unmarried (or if married, does not file a joint return).
2) A U.S. citizen, resident alien or national or a resident of Canada or Mexico.
3) Either a qualifying child or a qualifying relative.
The person must:
1) Be the taxpayer’s child, stepchild, eligible foster child, brother, sister, stepbrother, stepsister or descendant of any of them.
2) Be (a) younger than taxpayer and either under age 19 or a full-time student under age 24 or (b) any age if totally and permanently disabled.
3) live with the taxpayer more than half the year. (Or living in temporary lodging at a school)
4) Not provide more than half of his own support.
5) Not file a joint return (unless filed only to claim a refund).
The person must:
1) Not be the taxpayer’s or anyone else’s qualifying child.
2) Either (a) live with the taxpayer all year as a member of his household or (b) be related to the taxpayer.
3) Have gross income less than $3,800.
The taxpayer must provide more than half of the person’s total support for the year.

Basic Tests:
There are two common basic tests that apply regardless of whether a taxpayer is claiming a qualifying child or a qualifying relative as a dependent.
Taxpayer is not another’s dependent. A taxpayer cannot claim anyone as a dependent if he himself can be claimed as a dependent by another person. [IRC §152(b)(1)]
Joint return. A married person who files a joint return cannot be claimed as a dependent [IRC §151(b)(2)]. Exception: A joint return filed only to claim a refund of tax withheld when neither spouse is required to file and no tax liability would exist for either spouse if separate returns were filed.
Citizen or resident. To be a dependent, the person must be one of the following:
1) U.S. citizen or national or a resident alien.
2) Resident of Canada or Mexico. [IRC §152(b)(3)]

Qualifying child is one who meets the following six tests: [IRC §152(c)]
1) Relationship.
2) Age.
3) Residency.
4) Support.
5) Joint return.
6) Tie-breaker test if the child is the qualifying child of more than one person

Age test. The child must be either:
• Under age 19 at the end of the year and younger than the taxpayer (or spouse if MFJ).

• Under age 24 at the end of the year, a full-time student and younger than the taxpayer (or spouse if MFJ). A full-time student is one who is enrolled full-time in school (but not online or correspondence schools) during any part of five calendar months during 2012 or took a full-time course of institutional on-farm training under the supervision of an accredited agency. In Letter Rul. 9838027, the IRS allowed the taxpayer to count the month of August when a student registered on August 28 but did not start classes until September 2.
• Any age if totally and permanently disabled.

Member of household or relationship test. The person must:
1) Live in the taxpayer’s household for the entire year (temporary absences, such as those due to illness, education, business or military service are ignored if it is reasonable to assume the person will return to the household) or
2) Be related to the taxpayer in any of the following ways:
• Child, stepchild, eligible foster child, grandchild or great grandchild.
• Brother, sister, half-brother, half-sister, stepbrother or stepsister.
• Father, mother, grandparent or other direct ancestor (but not foster parent).
• Stepfather or stepmother.
• Son or daughter of taxpayer’s sibling or half-sibling.
• Brother or sister of taxpayer’s mother or father.
• Brother-in-law, sister-in-law, father-in-law, mother-in-law, son-in-law or daughter-in-law.
Note: Related persons do not need to be members of the taxpayer’s household. Also, relationships established by marriage are not ended by death or divorce.
A person who died during the year and was a member of the household until death meets the member of household test. A child who was born and died during the year meets the member of household test. A person does not meet the member of household test if at any time during the tax year the taxpayer’s relationship with the person is in violation of local law. [IRC §152(f)(3)]
Gross income test. The person must have less than $3,800 (for 2012) of gross income. [IRC §151(d)]
Gross income includes:
• All taxable income in the form of money, property or services.
• Gross receipts from rental property (do not reduce for taxes, repairs and other deductions).
• For a Schedule C business, net sales minus cost of goods sold plus miscellaneous business income.
• A partner’s share of the gross (not net) partnership income.
• Unemployment compensation and taxable scholarships and fellowship grants.
Gross income does not include:
• Tax-exempt income (certain Social Security benefits, municipal bond interest, some scholarship benefits, etc.).
• Income earned by a totally and permanently disabled person at a sheltered workshop operated by a tax-exempt organization or government agency that provides special instruction to alleviate the disability. To be excluded, the income must be incidental to medical care and must come solely from activities at the workshop.

Call 602-292-2009 today to get more information on dependent exemptions

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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Address: 4647 N 32nd Street, Suite B245
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Phone: 602-292-2009
Email: jeff@jbrookswa.com