The Tax Implications of Non-Child Dependents Can Be Tricky

When tax season rolls around, invariably I get inundated by tax questions.  Every once in a while, a tax question comes along that offers a unique perspective on a common tax issue. Recently, I had two such questions come into my email box.  Here is a summary of the situation, along with a couple of specific questions asked by this employee.

Last year, this person (I’ll call him Fred) had two guests live with him for the entire year.  The first resident was his mother, who receives $850 a month in Social Security benefits as her only source of income, and the second was his girlfriend.  Now his girlfriend was in school, and she has no income, but she did live with him for the entire year.

Here is the first question asked by Fred:

Can I claim my girlfriend as a dependent?

What a great question.  It would seem logical that she is based on the fact that she “depends” on Fred for her support while she is in school, but let’s see what the IRS has to say.

In order to qualify as a dependent, Fred’s girlfriend must live with him all year as a member of his household.  In addition, she must have gross income for the year of less than the exemption amount, which is $3,800 for tax year 2012, plus Fred must provide more than half of her total support for the year.  As long as these criteria are met, Fred’s girlfriend meets the definition of a dependent and therefore qualifies for a $3,800 exemption – SWEET!  For a nifty flowchart that explains the dependency of non-related persons, see http://blog.turbotax.intuit.com/2011/03/21/can-i-claim-my-girlfriend-as-a-dependent-on-my-taxes/.

Fred also wanted to know the following:

Can I file as head of household?

Hmmm.  According to IRS Publication 501, Fred may file as a head of household if he meets ALL of the following requirements:

  1. He is unmarried or considered unmarried on the last day of the year.
  2. He paid more than half the cost of keeping up a home for the year.
  3. A qualifying person lived with him in the home for more than half the year.

Since Fred is single and is fully responsible for maintaining his home, he certainly satisfies the first two criteria, but what about the third requirement?  We know he had at least two people, his mother and girlfriend, live with him for more than half the year, but are either of them considered a qualifying person?

According to Tble 4 of Publication 501, a qualifying person includes a qualifying relative that can be a parent for which the taxpayer may claim an exemption (i.e. claim as a dependent).  Now I think it is safe to say Fred’s mother is a relative, but is she a “qualifying” relative?  For a person to be considered a qualifying relative for exemption purposes, four tests must be met.  They are:

  1. Not a qualifying child test,
  2. Member of household or relationship test,
  3. Gross income test, and
  4. Support test.

It is clear Fred’s mother meets the first and second test, but what about the third and fourth test?

To meet the support test, Fred generally must provide more than half of his mother’s total support during the calendar year.  If he does, then she meets the support test.

To meet the gross income test, his mother’s gross income for the year must be less than $3,800.  Gross income is all income in the form of money, property, and services that is not exempt from tax.  Tax-exempt income, such as certain Social Security benefits, is not included in gross income for purposes of meeting this test.  While her Social Security benefits would exceed the $3,800 threshold, if this is her only source of income, chances are they would be nontaxable and thus excluded from gross income.  To be sure, Fred should determine what portion of his mother’s Social Security benefits, if any, are taxable (see http://www.irs.gov/uac/Are-Your-Social-Security-Benefits-Taxable%3F).

If all four tests are met, then Fred is able to file as head of household.

 

 

As you can see, things are not always as they appear.  Just because you maintain the home for another person does not automatically make you eligible to file as head of household, nor are you automatically able to claim someone as a dependent just because you support them.  On the flip side, even if someone does not live with you, you may still be eligible to claim them as a dependent.  As with many tax issues things are seldom black or white.  When in doubt, check the IRS publications (visit www.irs.gov) or work with a qualified tax professional.

 

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