Taxpayers are allowed a personal exemption and also one exemption for each person claimed as a dependent. IRC § 151. To claim the dependency exemption, the taxpayer must meet all of the five of the requirements prescribed in IRC §152 and discussed in IRS Publication 17. For 2014, each exemption provides the taxpayer with a deduction of $3,950. The amount of the deduction is annually adjusted for inflation. If a dependency exemption is denied, the taxpayer may lose not only the deduction for the exemption, but also the taxpayer may be denied head of household filing status and the earned income credit.
A summary of the five tests for claiming a dependency exemption appears below. The entire text of IRC §152 should be carefully read when dealing with this issue because there are numerous special rules under each of the five tests that may apply to the client’s situation.
Member of Household or Relationship Test
The first test is the member of household or relationship test. An individual must either be related to the taxpayer or be a member of the taxpayer’s household for the entire year. IRC §152(d).
An individual is related to the taxpayer if the individual is the taxpayer’s:
- 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
If the parents of a child may claim the child as a dependent but neither parent so claims the child, such child may be claimed as an dependent 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 child.
- A person is considered to live with the taxpayer for the entire year even if either the taxpayer or the person are temporarily absent 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, for example, 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 remainder of the year,
- As long as the taxpayer’s child was born alive during the year, the residency 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 the tax year the relationship between the taxpayer and that person violates local law.
A “child” includes:
- 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.
- 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 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.
The five calendar months do not have to be consecutive. A student who is enrolled for the number of hours or courses the school considers to be full-time attendance. 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. 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. 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.
The second of the five tests is the support test. This test requires that the dependent not have provided over one-half of his or her own support during the year. IRC §152(c)(1)(D). For this purpose, 183 days is considered more than half the year. Worksheet 3-1 in Publication 17 can be used to determine whether this support test is satisfied.
Multiple Support Agreements
1, Parents who have divorced may enter into a Multiple Support Agreement. IRC §152(d)(3),
- Each of the four requirements associated with a multiple support agreement must be met,
- No one person contributed over one-half of the support,
- Over one-half of the support was received from 2 or more persons each of whom, but for the fact that any such person alone did not contribute over one-half of the support, would have been entitled to claim the individual as a dependent for the taxable year,
- The taxpayer claiming the dependency exemption 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 third test is the 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
For purposes of the gross income test, all income in the form of money, property, and services that is not exempt from tax is gross income. This includes the following:
- 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.
Joint Return Test
The fourth test is the 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 fifth test is the citizenship or residency 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:
The evidence that will support a dependency exemption claim for an individual who lives with the taxpayer are as follows:
- 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.
For individuals who are claimed as dependents and who do not live with the taxpayer, the following evidence should be gathered:
- 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.
|IRS Forms and Publications|
|Publication 17||Chapter 3: Personal Exemptions and Dependents|
|IRS Publication 501||Exemptions, Standard Deduction & Filing Information|