There's a big tax benefit when you can claim someone as your dependent. You can take an exemption for that dependent. This lowers your taxable income, which lowers the amount of taxes you owe.
This benefit is not just for taxpayers who support their children. It also applies to qualified relatives. To be a "qualified relative," four tests must be met:
- Not a qualifying child test
- A relationship test,
- A gross income test, and
- A support test
Special rules apply for multiple support agreements and income of handicapped dependents. Also, there's a special support test in the case of students.
Not a Qualifying Child Test
A child is not your qualifying relative if the child is your qualifying child or the qualifying child of any other taxpayer. For instance, you can't take the qualifying relative exemption for your child if:
- The child is a full-time college student, lives with you, and meets all the tests to be your qualifying child
- The child lives with your parents and meets all the tests to be their qualifying child
To satisfy this test, the person must be one of several family relationships to the taxpayer, such as a niece or nephew. Another way to satisfy the test is if the person shared the taxpayer's home and was a member of the household. The relationship of child or grandchild will almost always be relevant to divorced or separated taxpayers.
Gross Income Test
To be a qualified relative, a person's gross income for the year in question must be less than the personal exemption amount for that tax year. The personal exemption amount for the 2010 tax year is $3,650. The amount for 2011 is $3,700.
To satisfy this test, you must provide over one-half of the person's support for the tax year in question. To figure this out, compare the amount you contributed to that person's support with the entire amount of support that person received from all sources - himself or herself, other family members, etc.
The IRS has a worksheet to help.
Special Rule for Multiple Support Agreements
It's possible that no single person provides more than half of another's support. Rather, two or more persons, each of whom would be able to take the exemption if they could pass the support test, work together to provide more than half of the person's support.
When this happens, you can make a multiple support agreement. Here, everyone agrees that one of you can claim the qualifying relative exemption. To do this:
- The taxpayer taking the exemption has to provide at least 10 percent of the person's support
- Anyone else who could have taken the exemption must sign a statement agreeing not to claim the exemption for that tax year
- A multiple support declaration listing everyone who agrees not to claim the exemption must be attached to the return of the person claiming the exemption
Special Rule for Handicapped Dependents
The gross income test has a special rule in the case of handicapped dependents. The gross income of a person who is permanently and totally disabled at any time during the year doesn't include income earned at a sheltered workshop if:
- The availability of medical care at that workshop is the main reason for the person's presence there, and
- The income is solely from workshop activities incident to that medical care
Special Rule for Students
For purposes of determining if a taxpayer has provided over one-half of an individual's support, a special rule applies if the person is the taxpayer's child and a student. Here, amounts received as scholarships for study at an educational organization don't count.
The IRS has a pamphlet with many more details, instructions and examples to help you figure out if you can claim a qualifying relative exemption. Read over this material carefully, and if you have any questions, talk to your lawyer or a professional tax preparer to make sure you're getting it right.
Questions for Your Attorney
- What is the difference between a qualifying child and a qualifying relative? Which applies to my situation?
- Is there a way to avoid the phase-out of exemptions if my spouse and I make too much?
- How do I set up a multiple support agreement? What happens if we can't agree?