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Can Your Mother-In-Law be a Tax Exemption?

Find out what it takes to claim dependents and get exemptions for income tax purposes.

By
Laura Adams, MBA,
November 4, 2008
Episode #096

 

Today’s show is about what makes someone a dependent, or an exemption, for income tax purposes.

Tax Exemptions Save Money

It’s important to understand who you can claim as a dependent on your taxes, because you get a tax exemption for each one. Tax exemptions are a good thing because they save you money by lowering the income on which your income tax is calculated.

Types of Tax Exemptions

There are two types of exemptions: 1) personal exemptions and 2) dependent exemptions. For 2008 the amount you can deduct for each of these exemptions is $3,500. But this amount is reduced by a phase out of exemptions once your adjusted gross income (AGI) gets into the six figures.

I received an email from Amanda in Fairfax, VA. She writes:

I recently got married to a wonderful guy. Now, during the post wedding clean up I was filling out new tax forms to change my tax status from single to married. My question is if I take no deductions and my new husband claims me as a dependent can that hurt or help us financially?

Thanks for the question Amanda and many congratulations! My advice is to always take every tax exemption that you can. You can usually claim one exemption for yourself and one for your spouse. These are the personal exemptions—your spouse is actually not considered your dependent, nor are you considered his dependent. Amanda, if no one else can claim your husband as an exemption, I recommend that you do so.

Requirement for Dependent Exemptions

The other category of tax exemptions are for dependents. You can claim one exemption for each person you can legally claim as a dependent. In order to claim a child as a dependent, they must have a social security number or taxpayer identification number and pass an exemption test. I’ll give you the test details in a moment.

If you’re divorced or separated from a spouse, the parent who has custody of the child for more than half of the tax year can claim the child as a dependent. It doesn’t matter which parent provided more financial support for the child during the year.

But what if you care for other family members, like a mother-in-law? Don’t you get to claim and receive a tax exemption for them as well? Absolutely… if they pass the exemption test that I mentioned. So here it is:

  1. They must be a relative OR if not a relative, live in your household all year

  2. They cannot file a joint tax return with a spouse, except to claim a refund of tax due

  3. They must be a citizen, resident or national of the U.S. OR be a resident of Canada or Mexico

  4. They must be someone for whom you provide over one half of their total financial support

  5. They must have less than $3,400 of gross annual income unless the dependent is a child under the age of 19 or a child who is a full-time student under the age of 24. Note that the $3,400 income threshold was the amount for 2007, and it may increase for 2008.

What is Gross Income?

It’s important to distinguish that gross income means all taxable income. This includes wages, unemployment benefits, receipts from rental property, and some social security benefits, for example. How much social security income is taxable depends on the total amount of benefits received and other income sources.

But if someone’s only income is social security, those benefits are generally not taxable, and that person will usually pass the test to qualify as a dependent. I’ll put a link in the show notes to IRS Publication 915 which gives complete details about what social security benefits are taxable.

Multiple-Support Arrangements

In some families, there may be several people who collectively support a dependent, such as a disabled parent. The law allows for a Multiple-Support Agreement, which is Form 2120. Each financial contributor to a dependent’s support must sign this form and submit it with their tax return. If the following four rules are met in a multiple-support arrangement, you can receive a tax exemption for the dependent:

  1. If you pay more than 10% of the person’s total financial support

  2. If the amount paid by you and others totals more than one half of the person’s total financial support

  3. If each contributor could have claimed the tax exemption on their own tax return, except that each gave less than one half of the total financial support

  4. If each contributor who paid more than 10% of the support agrees that you can take the tax exemption on your tax return

If you need more details about tax exemptions or the phase out amounts, I’ll put a link to IRS publication 501 in the show notes at moneygirl.quickanddirtytips.com.  Next week, I'll cover tax credits -- a different way to reduce your taxes!

Administrative

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Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.

Additional Resource:

IRS Publication 525: Taxable and Nontaxable Income

What Scholarships are Taxable

Image courtesy of Shutterstock

 

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