Qualified dependents can reduce tax dollars

Published 12:00 am Tuesday, March 25, 2003

Are you donating unnecessary tax dollars to the government? If you are not taking advantage of all the dependency exemptions you’re entitled to, you are probably volunteering payments to Uncle Sam. Does this scenario sound impossible?

According to local CPAs, many residents of the River Parishes are unknowingly overpaying their taxes.

If you have children living at home, it’s easy to identify your dependents. However, when an extended family lives together under one roof, or a family supports someone jiving elsewhere, identifying dependents gets more complicated. According to the local chapter of the Society of Louisiana CPAs (LCPA), here’s what you need to know about making the most of your dependency exemptions this tax season.

“In general” for 2002, each taxpayer may claim a personal exemption of $3,000,” notes Robert S. Angelico, LCPA chapter president. “If you are married and file a joint return, you and your spouse each claim a personal exemption. You can claim an exemption for your spouse, even if he or she died during the tax year, provided that you did not remarry before the end of that year. In addition, a taxpayer is entitled to an additional $3,000 dependency exemption for each qualified dependent. A child qualifies for an exemption, even if he or she is born on the last day of the year,” states Angelico.

Five part IRS test

To qualify as a dependent for tax purposes, an individual must meet all five tests below.

1. The Citizenship Test

The person must have been a citizen of the United States or a resident of the United States, Canada, or Mexico.

2. The Relationship or Member of Household Test

The dependent must be a qualified relative or a member of your household for the entire year. If the dependent is a qualified relative — including members of your immediate family or step family, foster child, immediate in-laws, aunts and uncles, grandparents, and first generation nieces and nephews — he or she is not required to live with you. If the dependent lives with you, he or she does not have to be a qualified relative.

3. The Gross Income Test

The dependent’s gross income must be less than the amount of the exemption allowance for the year ($3,000 in 2002). The gross income test does not apply if the dependent is your child who is less than 19 years old at the end of 2002, or less than 24 at year-end and a full-time student for at least five months of the tax year. The term “gross income” refers to taxable income items included in the dependent’s tax return. Nontaxable Social Security benefits and nontaxable scholarship funds are not included.

4. The Joint Return Test

If the dependent is married, he or she cannot file a joint return with his or her spouse, unless (1) the income of each spouse is under the income limit for filing a return and (2) the return is filed for the sole purpose of claiming a tax refund.

5. The Support Test

You must be able to establish that you provided more than half the cost of supporting that person. Support includes the cost of shelter, food, clothing, education, health care, transportation, and similar necessities. In calculating support an individual pays for him or herself, include only amounts actually spent. Money the individual has available, but did not spend, is not included.

Special rules for special cases

In the case of divorced parents, the general rule is that the custodial parent claims the, dependency exemption even if the non-custodial parent paid most of the child support.

However, the custodial parent may agree to waive the exemption by signing Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents.

The non-custodial parent attaches this form to his or her return and claims the exemption. If two or more persons together provide more than 50 percent of an individual’s support, but no one member of the group provides more than half, the individuals may enter into a multiple support agreement. Under this agreement, the dependency exemption may be claimed by any person providing more than 10 percent of the individual’s support. If you are that person, you must have each person who contributes over 10 percent sign IRS Form 2120, Multiple Support Declaration, which you submit with your tax return.

Exemption phases out

If you are a high-income taxpayer, your deductions for personal and dependency exemptions may be partially or completely phased out. For 2002, the phase out begins when a taxpayer’s AGI reaches $206,000 for joint filers, $137,300 for single filers, and $171,650 for heads of household.

How to claim an exemption

To claim an exemption for a dependent, you must file Form 1040 or Form 1040A and include the social security number of each dependent.