Dependents and Exemptions - Facts You Should Know
Every tax return is unique and each person’s situation is different. While there are differences in earned income, tax rates, itemized deductions and other factors, the Internal Revenue Service is very clear about whom you can claim as a dependent and what the deductions should be.
The number of exemptions reduces your taxable income. You have a personal exemption for you and your spouse (if married) and you have exemptions for each dependent. For 2011, the deduction for each dependent is $3,700.
A spouse can never be a dependent as we will explain below. When you file a joint return, you claim one exemption for yourself and one for your spouse. If you are filing as Married Filing Separately, you may claim your spouse as an exemption only if the spouse had no income and is not claimed as a dependent of another tax payer.
There are new rules for claiming children as dependents. Each child must meet four criteria
- Relationship – the person must be your child, step child, adopted child, foster child, brother or sister, or a descendant of one of these (for example, a grandchild or nephew).
- Residence – the child must have lived in the same residence as you for at least six months of the past year.
- Age – the person must be under the age of 19. However, if they are a full-time student, then the maximum age is 24. If your child is permanently disabled, there is no age limit.
- Support – the person you are claiming cannot have earned more than half of their total support during the year.
When you claim someone on your tax return as a dependent, you must provide the IRS with that person’s legal name, date of birth and social security number. Leaving any of these items off your return will flag your return and it will not be processed with due speed. Rather, you will receive a letter from the IRS telling you that there is needed information.
Additional rules governing dependent status include that your dependent must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There are less stringent rules for adopted children. As a positive note, if you had a baby born on December 31, 2012, you are allowed to deduct the baby as if he or she lived in your household the entire year.
For parents who have high school or college students who work and earn income, be adamant with them that they cannot claim themselves for their exemptions. They must file with no exemptions. Generally, their tax rates will be in the 10% bracket where yours can be in the 25% or higher bracket. It costs you more in taxes than the dependent gets back in refunds if they claim themselves. A wise move is to have the dependent’s taxes prepared at the same time you have your taxes prepared.
If you need help determining who you can legally claim as a dependent and how much you can deduct for each exemption you claim, please do not hesitate to contact us. We’d be glad to help.
|I.J. Zemelman, EA is the founder of Taxes for Expats
She may be reached at: +1-646-397-2887
Web site: www.taxesforexpats.com