J. William Seabrooke CPA P.C.

This area of the tax laws can become very complex, very quickly, principally due to the myriad of actual personal life situations that exist in the world today.  For example, married, single, head of household, domestic partners, taxpayers who are living together but are not married, or children, married older children living at home while attending college, divorced, separated, foster parents, adopted children, relatives, etc, etc.

Two important terms that are being presented in this article are “dependents” and “exemptions.”  A “dependent” is someone who is dependent upon you for some or all of their support.  Support in this context may be financial (money) or in-kind (food, shelter, expenses etc). An “exemption” reduces your “Taxable Income” on your tax return. Each “exemption” that you claim on your tax return is the equivalent of a $3,650 tax deduction.  Generally speaking, you are allowed one tax “exemption” for yourself, one for your spouse (married taxpayers), and one for each of your qualified “dependents” on your tax return.

Generally, you must provide more than half of the total annual support each year for a qualified person(s) before you are entitled to claim that person(s) as a dependent.  However, suppose that you and your three sisters are each providing one fourth of the total annual support for both of your elderly parents?  In this situation you should review “Multiple Support Agreements” on page 19.  

One of the best references to explain the applicable provisions fo the tax laws for these two subjects is IRS Publication 501 (“Exemptions, Standard Deduction, and Filing Information”)  Here is the link:  http://www.irs.gov/pub/irs-pdf/p501.pdf     Specifically, read pages 3-21.  You also may need to consult with your tax preparer or tax advisor.  There are three tests that must be met for “exemptions” (page 10) and five tests for a qualifying child (pages 11-21)  There are provisions in the tax laws for many (if not most) of the actual real-life situations.  You will find a section for a child who was born alive but later died, stillborn children, foster care parents, students, and either divorced or separated parents.

There are also other tax law provisions, if you are the parent of a qualifying child: 

Ten Tax Benefits for Parents 

Did you know that your children may help you qualify for some tax benefits? Here are 10 tax benefits the IRS wants parents to consider when filing their tax returns this year.

1. Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
2. Child Tax Credit You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. For more information see IRS Publication 972, Child Tax Credit.
3. Child and Dependent Care Credit You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work. For more information see IRS Publication 503, Child and Dependent Care Expenses.
4. Earned Income Tax Credit The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.
5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child.  Taxpayers claiming the adoption credit must file a paper tax return because adoption-related documentation must be included.  For more information see the instructions for IRS Form 8839, Qualified Adoption Expenses.
6. Children with Earned Income If your child has income earned from working they may be required to file a tax return. For more information see IRS Publication 501.
7. Children with Investment Income Under certain circumstances a child’s investment income may be taxed at the parent’s tax rate. For more information see IRS Publication 929, Tax Rules for Children and Dependents.
8. Higher Education Credits Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income.  For more information see IRS Publication 970, Tax Benefits for Education.
9. Student loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions. For more information see IRS Publication 970.
10. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage after March 29, 2010, for any child of yours who was under age 27 at the end of 2010, even if the child was not your dependent. For more information see the IRS website.

The forms and publications on these topics can be found at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

  Links:

• IRS Forms and Pubilcations
• IRS YouTube Videos