Tax Unit: Module 4

For Consumer Math Class

East Jackson High School

Module 4: Dependents

IntroductionTaxpayers reduce their taxable incomes for each dependency exemption claimed.

A dependent may be either a “Qualifying Child” or a “Qualifying Relative.”

Dependents A dependent is a person other than the

taxpayer or spouse who entitles the taxpayer to claim a dependency exemption.

Each dependency exemption decreases income subject to tax by the exemption amount. The exemption amount changes each year. For 2014, the exemption was $3,950.

A taxpayer cannot claim a dependency exemption for a person who can be claimed as a dependent on another return.

Qualifying Child To claim a dependency exemption for a

qualifying child, all of the qualifying child dependency tests must be met:

1. Dependent Taxpayer Test

2. Joint Return Test

3. Citizenship Test

4. Relationship Test

5. Age Test

6. Residency Test

7. Support Test

1. Dependent Taxpayer Test (QC)

If you could be claimed as a dependent by another person, you cannot claim anyone as a dependent.

Even if you have a qualifying child or a qualifying relative, you cannot claim that person as a dependent

2. Joint Return Test (QC)

To meet this test, the child must be:Unmarried,Married but does not file a joint return, orMarried and files a joint return only to claim a

refund of withheld tax, neither the dependent nor spouse can claim personal exemption on their joint return

3. Citizen or Resident Test (QC)

To meet this test, the child must be:A U.S. citizen or resident orA resident of Canada or Mexico

4. Relationship Test (QC)

To meet this test, the child must be:Your son, daughter, stepchild, eligible foster

child, adopted child, or a descendant (for example, your grandchild) of any of them, or

Your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendent (for example, your niece or nephew) of any of them

5. Age Test (QC)

To meet this test, the child must be:Under age 19 at the end of the yearA full-time student under age 24 at the end of

the year, orPermanently and totally disabled at any time

during the year, regardless of age.

6. Residency Test (QC)

To meet this test, the child must:Have lived with you for more than half of the

yearMeet one of the exemptions listed below:

Temporary absences – illness, education, business, vacation, military service

Death or birth of a child – a child who was born or died during the year

7. Support Test (QC)

To meet this test, the child must:Not have provided more than half of his or her

own support

There are special rules for a child that is the “qualifying child” of more than one person. Do research or get professional advice if you encounter this situation

Qualifying Relative To claim a dependency exemption for a

qualifying relative, the person must meet the following tests:

1. Dependent Taxpayer Test2. Member of Household or Relationship Test3. Joint Return Test 4. Citizenship Test 5. Gross Income Test6. Support Test 7. Not a Qualifying Child Test

1. Dependent Taxpayer Test (QR)

If you could be claimed as a dependent by another person, you cannot claim anyone as a dependent.

Even if you have a qualifying child or qualifying relative, you cannot claim that person as a dependent.

2. Member of Household or Relationship Tests (QR)

Member of household – The person must live with the taxpayer for the entire year as a member of the taxpayer’s household.

OR Relationship – The person must be related to the

taxpayer in one of the allowable ways. Certain relatives do not have to be members of the taxpayer’s household for the entire year.

2a. Member of Household Test (QR)

Taxpayers will meet this test for all persons who live with the taxpayer as a member of the household if the persons pass the member of household test.

o The dependent does not have to be related to the taxpayer.

o The dependent must live with the taxpayer all year except for temporary absences. (Temporary absences include attending school, taking vacations, and staying in the hospital.

o The relationship between the taxpayer and the dependent must not violate local laws.

2b. Relationship Test (QR)

Taxpayers will meet this test for the relatives listed to the right, if the relatives meet the requirements of the relationship test.

Tax Tip: Cousins do not meet the relationship test. Relatives do not have to be members of the taxpayer’s household. Relationships established by marriage are not ended by death or divorce. For example, a daughter-in-law is a relative to her in-law parents even after the death of their son (her husband)

Tax Tip: There are special rules for children born during the year, adopted children, and foster children.

• child

• parent

• brother/sister

• stepparent

• stepchild

• stepbrother/stepsister

• half brother/half sister

• grandparent

• grandchild

• son-in-law/daughter-in-law

• mother-in-law/father-in-law

• brother-in-law/sister-in-law

If related by blood, relatives also include:

• uncle/aunt

• niece/nephew

Quick Check!_____1. Matthew’s cousin lived with him all year.

a. Relationshipb. Member of Householdc. Bothd. Neither

_____2. Rebecca’s daughter lived at college for nine months during the year.a. Relationshipb. Member of Householdc. Bothd. Neither

_____3. Tammy’s best friend lived with her all year.a. Relationshipb. Member of Householdc. Bothd. Neither

_____4. Jackie’s cousin visited every weekend during the year.a. Relationshipb. Member of Householdc. Bothd. Neither

3. Joint Return Test (QR)

Taxpayers will meet this test for persons who are

unmarried,

married, but do not file a joint return,or

married and file a joint return only to claim a refund of withheld tax; neither would have a tax liability on Separate Returns; neither the dependent nor spouse can claim personal exemptions on their joint return.

4. Citizen or Resident Test (QR)

Taxpayers will meet this test for persons who are, for some part of the year,

o U.S. citizens or residents

ORo Residents of Canada or Mexico

Quick Check!Tyler, a U.S. citizen, is single and studied on an exchange program in Costa Rica during the year. Tyler’s parents want to claim a dependency exemption for him. ___1. Does Tyler meet the relationship test?

a. Yesb. No

___2. Does Tyler meet the joint return test?a. Yesb. No

Sami’s parents want to claim a dependency exemption for her. Sami (18) is married and files a joint return with her husband. Sami’s husband is an attorney; he earns $47,500 per year. Sami and her husband owe $500 in tax; they will not receive a refund of withheld tax.___1. Does Sami meet the relationship test?

a. Yes b. No

___2. Does Sami meet the test to be a “qualifying child”? a. Yes b. No

___3. Can Sami’s parents claim a dependency exemption for her? a. Yes

b. No

5. Gross Income Test (QR)

Gross Incomeo is all taxable income in the form of money, property,

and services;o includes unemployment compensation and certain

scholarships; and o does not include welfare benefits and nontaxable

Social Security benefits.

Taxpayers will meet this test for persons whose gross incomes are less than the exemption amount, which was $3,950 in 2014.

6. Support Test (QR) Taxpayer’s will meet this test if the taxpayer provided more than

half of a person’s total support for the entire year.

Total support includes food, clothing, shelter, education, medical and dental care, recreation,

and transportation; and welfare, food stamps, and housing provided by the state.

Compare the dollar value of the support provided by the taxpayer with the total support the person received from all sources.

Tax Tip: There are special rules for dependents who receive support from multiple sources and for children of divorced or separated parents.

Important point: The gross income test considers the dependent’s taxable income. The support test considers all income, taxable and nontaxable.

Quick Check!Mai-Lei’s mother received $3,200 in nontaxable Social

Security payments and $900 in taxable interest income. Mai-Lei’s mother paid $3,350 for lodging, $400 for recreation, $250 for clothes, and $100 for transportation. Mai-Lei paid $2,100 for her mother’s food and $800 for her medical bills.

1. What is the total support for Mai-Lei’s mother?______

2. How much did Mai-Lei provide toward her mother’s support? ___________

3. Can Mai-Lei claim a dependency exemption for her mother?a. Yesb. No

$7,000

$2,900

Support Test ExampleMs. Hernandez is 72 years old and lives in an apartment.

Last year she received $3000 in nontaxable Social Security benefits and $400 in taxable interest income, all of which was used for her support.

Ms. Hernandez’s daughter, Theresa, paid $4800 during the year toward her mother’s support.

Total support includes taxable and nontaxable income.

Ms Hernandez’s total support is $8200. Theresa paid more that half of her mother’s support ($4800/$8200 = 59%).

Theresa can claim a dependency exemption for Ms. Hernandez.

Comprehensive ExampleBeatrice (18) is a single Canadian citizen who lives in Vancouver with her mother the entire year. In 2013, Beatrice earned $2450. Beatrice’s mother provided 60 percent of Beatrice’s total support. Beatrice’s mother is not a dependent of any one else. Can Beatrice’s mother claim a dependency exemption as a qualifying child” for her?

o The relationship test is met-Beatrice is the taxpayer’s daughter. o The dependent taxpayer test is met – Beatrice’s mother is not a

dependent of anyone else.o The citizenship test is met-Beatrice is a resident of Canada. o The joint return test is met-Beatrice is single. o The age test is met – Beatrice is under 19o The residency test is met – Beatrice lived with her mother all year. o The support test is met-Beatrice did not provide more than half of her

own support

Beatrice’s mother can claim a dependency exemption for her.

Quick Check!Hector, a U.S. citizen, is

single and 17 years old. He lives with his father in New York City all year. Hector earned $3800 and used it to buy a motorcycle. Hector’s father provided more than half of his support. Hector’s father is not the dependent of anyone else

___ 1. Relationship testa. Yesb. No

___ 2. Residency Testa. Yesb. No

___ 3. Joint Return Testa. Yesb. No

___ 4. Dependent Taxpayer Testa. Yesb. No

___ 5. Age Testa. Yesb. No

___ 6. Support Testa. Yesb. No

___ 7. Citizenship or Resident Testa. Yesb. No

___ 8. Can the father claim a dependency exemption for Hector

a. Yesb. No

Review!___1.Each dependency exemption decreases income subject to tax.

a. Trueb. False

___2. A person can be claimed as a dependent on more than one income tax return.a. Trueb. False

___3. The age test applies to a Qualifying Child.a. Trueb. False

___4. The Relationship Test must be met for a Qualifying Relative.a. Trueb. False

Simulation for Module #4

You will be given 3 Profiles. You must decide if each person can claim the dependent. Do these on your own.

Profile #1: Michael Brand You are employed by Center City Printing Company

You are single and a U.S. Citizen

Your younger brother David, is 14 years old. He is a U.S. Citizen. In March, he moved into your home. David will live with you until he finishes high school. David does not have a job or any other source of income. Since March, David has depended on you for all of his support for the year.

You cannot be claimed as a dependent on any other person’s tax return.

You earned a gross income of $43,523 last year.

Dependency Tests for David1. Relationship Test yes or no

2. Citizen or Resident Test yes or no

3. Joint Return Test yes or no

4. Age Test yes or no

5. Support Test yes or no

6. Residency Test yes or no

7. Can you claim David as a dependent on your tax return?

yes or no

Profile #2: Samantha Nichols You are a computer operator

You are single and a U.S. citizen

You have a daughter, Joanna, age 5. Joanna lived with you for the entire year. You and Joann’s father were never married. Each month, Joanna’s father sends you a $200 check for child support. You spend an additional $700 a month providing support for Joanna, including her food, clothing, medical expenses, and half of the housing costs. In the summer Joanna spent a 2-week vacation with her father.

You cannot be claimed as a dependent on any other person’s return.

Last year you earned a gross income of $39,125.

Dependency Tests for Joanna1. Relationship Test yes or no

2. Citizen or Resident Test yes or no

3. Joint Return Test yes or no

4. Age Test yes or no

5. Support Test yes or no

6. Residency Test yes or no

7. Can you claim Joanna as a dependent on your tax return?

yes or no

Profile #3: Sandy Prashad You are employed by a consulting firm.

You are single, with no children, and a U.S. citizen.

For the last two years, your widowed father, who is 83 years old, has lived with you. You provide almost all of the support for your father.

You cannot be claimed as a dependent on any other person’s return.

It’s the last day of the year. You have earned $61,617 from your job and $2,010 in interest income. Your father earned $5895 in interest income during the year.

Dependency Tests for Your Father

1. Member of Household or Relationship Test yes or no

2. Citizen or Resident Test yes or no

3. Joint Return Test yes or no

4. Gross Income Test yes or no

5. Support Test yes or no

6. Can you claim your father as a dependent on your tax return?

yes or no

Answers To Profiles

Profile #1: Michael and David

Michael can claim David as a dependent.

Profile #2: Samantha and Joanna

Samantha can claim Joanna as a dependent.

Profile #3: Sandy and her father

Sandy cannot claim her father as a dependent. The Gross Income Test was not met.

Congratulations!

You have just successfully completed Module 4!

All information came from the Internal Revenue Service Understanding Taxes

Program

www.irs.gov/app/understandingTaxes/jsp/S_student_lessons.jsp