Taxpayers are allowed one exemption for each person claimed as a dependent. To claim the exemption, the taxpayer must meet all five of the requirements outlined by IRC §152 and IRS Publication 17.
If a dependency exemption is denied, the taxpayer loses not only the deduction for the exemption, but the taxpayer may also lose head of household filing status and the earned income credit. A dependency exemption is not only available for a minor child of the taxpayer. The exemption may also be available if the dependent is an adult child, another relative (a parent, brother, sister etc.), or even someone who is not related to the taxpayer but who lives with the taxpayer.
If a dependency exemption has been disallowed, determine why the IRS denied the exemption. Often in divorced families there may be a dispute as to who is entitled to the exemption for a child with both parents claiming the exemption. Other times some basic documentation is needed to show the IRS that the exemption is valid. In all cases, student attorneys will have to use investigative skills to gather supporting documentation. Affidavits from a landlord, neighbor or even a friend or relative could support the taxpayer’s claim.
Rules & Requirements
For years after December 31, 2008, the law has changed to prevent situations where a parent is living in a household with another employed family member and the parties in essence split the dependents. A typical situation is the mother is working and one of her children is working and there are three children under the age of 19 who are not working. In that situation, the mother may have claimed 2 of the children and the other family member claims the remaining child to maximize the Earned Income Tax Credit. The test is not whether the parent did claim the child, but could the parent claim the child and if so then the one with the highest gross income is entitled to claim the child. These are sometimes referred to as modifications to the tie-breaker rules.
The Fostering Connection to Success and Increasing Adoptions Act of 2008 (P.L. 110-351) inserted in section 152(c)(4)(C) which states “NO PARENT CLAIMING QUALIFYING CHILD - If the parents of an individual may claim such individual as a qualifying child but not parent so claims the individual, such individual may be claimed as the qualifying child of another taxpayer but only if the adjusted gross income of such taxpayer is higher than the highest adjusted gross income of any parent of the individual.”
For years past 2004, the law has changed from that discussed below to include a uniform definition of a qualifying child for purposes of dependency, head of household filing status, and the EITC. The support test for dependency has also been modified.
Section 152 of the Internal Revenue Code provides the legal basis for a taxpayer to claim a dependency exemption. IRS Publication 17 provides guidance for applying the law and making the dependency determination by outlining a 5-part test as follows:
Member of Household or Relationship Test
The taxpayer must show that the dependent was a member of his household for the entire year or was related in the following capacity:
- Son or daughter, grandchild, stepchild, or adopted child;
- Brother or sister;
- Brother or sister by the half blood;
- Stepbrother or stepsister;
- Mother or father, ancestor of either;
- Stepfather or stepmother;
- Son or daughter of taxpayer’s brother or sister;
- Brother or sister of taxpayer’s father or mother;
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law (the widow of a taxpayer’s deceased wife’s brother is not considered a sister-in-law); or
- A person (other than the taxpayer’s spouse) who, during the taxpayer’s entire tax year, lives in the taxpayer’s home and is a member of the taxpayer’s household (but not if the relationship between the person and the taxpayer is in violation of local law).
- A person is considered to live with the taxpayer for the entire year even if either the taxpayer or the person are temporarily absence due to special circumstances.
- Temporary absences due to special circumstances include absences because of illness, education, business, vacation, or military service.
- An absence is considered temporary if the person is placed in a nursing home for an indefinite period of time to receive constant medical care.
Death or Birth of a Dependent
- A person who died during the year, but was a member of taxpayer’s household until death, will meet the member of household test.
- The same is true for a child who was born during the year and was a member of taxpayer’s household for the rest of the year.
- As long as the taxpayer’s child was born alive during the year, the household test will be satisfied even if the child lived only for a moment.
- Taxpayer cannot claim an exemption for a stillborn child.
Violation of Local Law
A person does not meet the member of household test if at any time during your tax year the relationship between you and that person violates local law.
The taxpayer must provide over one-half of the support for the person during the year [IRC §151(a)] 183 days is considered more than half the year.
Multiple Support Agreements
- Often times parents who have divorced enter into what is known as a multiple support agreement.
- Although a taxpayer has not contributed more than one-half of the support of an individual, he or she may still claim a dependency exemption for the individual if the taxpayer is one of a group of individuals who have collectively contributed more than one-half of the support [IRC §152(c)].
- However, the following conditions must be met:
- Each member of the group would have been entitled to claim the individual as his dependent but for the fact that he did not contribute more than half of the support.
- The member of the group claiming the dependency exemption has contributed more than 10 percent of the support; and,
- Each member of the group who contributed more than 10 percent of support (except the taxpayer claiming the exemption) files a written declaration on Form 2120 that he will not claim the individual as his dependent for the tax year.
The members of the group may, for example, take turns at claiming the deduction. But if more than one-half of a dependent’s support is furnished by one individual, that individual is the only one who can claim the dependency deduction.
A taxpayer paying part of the support for a group of individuals would be denied any dependency deduction unless he furnished more than one-half of the support for the entire group, or unless he could prove that his contributions were directly allocable to one or more members of the group. He could not, for example, claim two of five persons as dependents just because he furnished 40 percent of the support for the group.
Gross Income Test
The dependent must not have had gross income in excess of the exemption amount for the year involved (does not apply if person is taxpayer’s child who is under 19 or is a student under 24) [IRC §152(c)(1)(A)].
Gross Income Defined
All income in the form of money, property, and services that is not exempt from tax is gross income.
- Total net sales minus the cost of goods sold, plus any miscellaneous income from the business
- Gross receipts from rental property
- A partner’s share of the gross, not a share of the net, partnership income
- All unemployment compensation and certain scholarship and fellowship grants. Scholarships received by degree candidates that are used for tuition, fees, supplies, books and equipment required for particular courses are not included in gross income.
- Son, stepson, daughter, stepdaughter, a legally adopted child, or a child who was placed with taxpayer by an authorized placement agency for taxpayer’s legal adoption.
- A foster child who was a member of taxpayer’s household for the entire tax year is also considered his child.
Custodial Parent Defined
- A custodial parent will be the one with whom a child lives for the most number of nights in a calendar year for purposes of determining who can claim the child as a dependent when the parents are divorced, separated, or live apart. Proposed rule REG-149856-03.
- If a child is temporarily absent from a parent’s home for a night, the child is treated as living with the parent with whom the child would have lived for the night.
- Tie Breaker Rule – in the event of a tie where the child lives with each parent and equal number of nights, the parent with the higher adjusted gross income is treated as the custodial parent.
- Release to Claim Exemption – the custodial parent may release the claim to an exemption for a single year, multiple years, or all future years. The declaration must include an unconditional statement that the custodial parent will not claim the child as a dependent for the specified year or years.
- Right to Revoke – a custodial parent who released the right to claim a child by providing written notice of the revocation to the other parent.
A student who is enrolled for the number of hours or courses the school considers to be full-time attendance.
Student. A child must be, during some part of each of any five calendar months during the calendar year:
- A full-time student at a school that has a regular teaching staff, course of study, and regular student body.
- A student taking a full-time, on-farm training course given by a school described in (i), or a state, county, or local government.
Note: The five calendar months do not have to be consecutive.
School. A school can be an elementary school, junior or senior high school, college, university, or technical, trade, or mechanical school. However, on-the-job training courses, correspondence schools, and night schools do not count as schools for the EIC.
Vocational high school students. Students who work in co-op jobs in private industry as a part of a school’s regular course of classroom and practical training are considered full-time students.
Night school. Child is not a full-time student if he or she attends school only at night. However, full-time attendance at a school may include some attendance at night as part of a full-time course of study.
Joint Return Test
No dependency exemption is allowed if the dependent is married and files a joint return with his or her spouse [IRC §151(c)(2)].
Citizenship or Resident Test
The dependent must be a citizen, national, or resident of the United States, a resident of Canada or Mexico at some time during the calendar year in which the tax year of the taxpayer begins, or an alien child adopted by and living with a U.S. citizen or national as a member of his household for the entire tax year.
Documents to Support a Dependency Exemption Claim
These should all be copies and not originals. Never send originals to the IRS and return all originals to client after copying.
Dependents Who Live With Taxpayer:
- List of person(s) who lived in taxpayer’s household during the tax year. Include name, relationship, social security number and the number of months or days each person lived in household during the tax year
- Copy of dependent’s birth certificate or green card if not US citizen
- Copy of the Social Security card for dependents 1 year of age or older
Note for Puerto Rico Birth Certificates:
- In order to protect against identity theft, the Government of Puerto Rico enacted a new law (Law 191 of 2009 as amended) that provides for the issuance of security-enhanced birth certificates beginning July 1, 2010, and invalidates Puerto Rican birth certificates issued prior to that date. Consequently, the Internal Revenue Service will no longer accept birth certificates issued by the Government of Puerto Rico prior to July 1, 2010, as proof of age, relationship, or identity. See Internal Revenue Manual (IRM) IRM 18.104.22.168.7 (3) The new information appears as the second “Note” in the table.A taxpayer who submits a Puerto Rican birth certificate issued prior to July 1, 2010, will be informed of the new law and directed to contact the Puerto Rico Vital Statistics Record Office to obtain a new birth certificate. More information about the new law and how to request a new birth certificate is available from the Puerto Rico Federal Affairs Administration at http://www.prfaa.com/birthcertificates/
- School records or transcripts containing the dependent’s name, address and dates of attendance for the tax year, if the dependent was a full-time student over 18 and under age 24
- Statement from the government agency verifying the amount and type of benefits taxpayer and/or taxpayer’s dependent received for the tax year, if taxpayer received any government benefits
- Official letter or document stating that the dependent is disabled, if dependent was over 18 on December 31 of tax year and permanently and totally disabled
- Copy of lease/rental agreement or taxpayer’s last mortgage statement for the year (If the taxpayer has a PO Box as the address, a copy of Postal form 1093 can be requested from the Post Office to obtain geographical address)
- Copies of utility bills (water, electricity, telephone, cable) for the tax year
- Copies of cancelled checks/receipts for rent/mortgage payments and household expenses paid during the tax year
- Evidence showing taxpayer lived at the same address as dependent if not related as listed above: w-2’s, utility statements, bank account statements, etc
- Copy of the dependent’s income tax return if one was filed
- Copy of taxpayer’s divorce decree or separate maintenance agreement, if taxpayer was divorced or legally separated from the dependent’s other parent, and any written agreement showing which parent will have custody and/or claim the dependency exemption
- A computation of the total cost of the dependent’s support including the amount of income or other funds received by or for the dependent. Show how these funds were used and the amounts contributed to household expenses by each person living in the household with the dependent
- The name, address, and phone number of any person or agency (including but not limited to Social Security Adm., Social Services, Veterans Adm.,) that provided funds for the dependent’s support and a statement from the person or agency, showing the amount provided
- Cancelled checks and receipts to verify amounts taxpayer spent for the dependent’s support, if the dependent did not live with him. If possible, provide a signed statement from each person with whom the dependent lived, confirming that the person did not claim an exemption for the dependent and that taxpayer furnished more than half of the dependent’s total support
- A copy of taxpayer’s divorce decree or separate maintenance agreement, if taxpayer was divorced or legally separated from the dependent’s other parent, and any written agreement stating which parent will have custody and/or claim the dependency exemption
- For Tax Year 1985 and later, a Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, or similar statement, signed by the custodial parent agreeing not to claim an exemption for the child, or similar statement or copy of the following pages from the decree or agreement is attached instead of Form 8332:
- Cover page (with the other parent’s social security number)
- The page that states the non-custodial parent can claim the child as a dependent, and
- Signature page showing the date of the agreement
- Copy of the Social Security card for dependents 1 year of age or older
- Copy of dependent birth certificate or green card if not US citizen
|Internal Revenue Code|
|IRC §151||Allowance of deductions for personal exemptions|
|IRC §152||Dependent defined|
|Treas. Reg. §1.151-1||Deductions for personal exemptions (4/02)|
|Treas. Reg. §1.151-2||Additional exemptions for dependents (4/02)|
|Treas. Reg. §1.151-3||Definitions (4/02)|
|Treas. Reg. §1.151-4||Amount of deduction for each exemption under §151 (4/02)|
|Treas. Reg. §1.152-1||General definition of a dependent (4/02)|
|Treas. Reg. §1.152-2||Rules relating to general definition of dependent (4/02)|
|Treas. Reg. §l.152-3||Multiple Support Agreements|
|Treas. Reg. §1.152-4||Support test in case of child of divorced or separated parents (4/02)|
|Treas. Reg. §1.152-4T||Dependency exemption in the case of a child of divorced parents, etc. (Temporary) (4/02)|
|IRS Forms and Publications|
|Publication 17||Chapter 3: Personal Exemptions and Dependents|
|IRS Publication 501||Exemptions, Standard Deduction & Filing Information|