When your family gets a little larger, so do your expenses. At the same time, your tax return also gets more complicated as you have to add new exemption and qualify for more credits and deductions. What is an exemption? It is the amount that can be subtracted from your adjusted gross income based on your dependents. You are allowed to claim a personal exemption for yourself and various family members. These exemptions are similar to deductions. So who can you claim as an exemption? Working with your tax professional at Kaufmann Advisors in San Francisco, CA, you can determine if any of the following apply to your family.
Defining a Qualifying Child
You may claim an exemption for each of your children, which can include a biological child, step-child, foster child, sibling or step-sibling. A grandchild can also be applied, but there are eligibility requirements. Any child must live with you more than half of the year and be under 19 by the end of the tax year. If your child is under 24 and a full-time student, then you can also claim them as an exemption. Keep in mind, the child must be enrolled for at least five months within the calendar year to qualify.
Additionally, the child cannot provide more than half of their own support, or you cannot claim them as an exemption. However, there is no gross income limit for the child, as long as they do not exceed the guidelines above.
Other Qualifying Relatives
In the wake of the recovery from the recession, many families have consolidated. As a result, parents and grandparents or other relatives may receive support from their children or grandchildren. This can occur even if the parties are not living under the same roof. This may allow you to claim an additional exemption. However, there are five different criteria that must be met to be considering a qualifying relative.
Keep in mind that all of these criteria must be met to claim the exemption for any individual. Consult with your tax professional if you have any questions about claiming the exemption for a member of your household.
What Defines a Relative
An individual who lives with you for the entire year as a household member, even if they are not a traditional relative through marriage or by blood. However, if they did not live with you all year, you need to be sure to define the nature of the relationship. Just because they did not live with you does not necessarily mean you cannot claim them as a dependent and receive the exemption. Here is a list of individuals that can be considered to be relatives of a taxpayer:
Therefore, it is important to have all relationships clearly defined prior to preparing your tax return and before claiming any individuals as exemptions on your return.
Limits to Exemptions
Keep in mind that a person cannot be claimed as an exemption by two different taxpayers, nor can a child claim an exemption for themselves on their tax return and be claimed on their parents’ tax filing. To avoid the same individual being claimed multiple times, you must enter their social security number on the tax form. The IRS has software that allows them to tell if a dependent has been claimed twice.
There are also special rules for children of divorced parents. Consult with your tax preparer if you have a shared custody situation with your former partner or spouse. They will be able to guide you through the process of claiming your child as an exemption, depending on your custody agreement.
Finally, it is important to note that while exemptions do reduce your taxable income, there may be limitations to who you can claim as a dependent. Call or click on the link below to speak with a tax professional at Kaufmann Advisors in San Francisco, CA, about how you can maximize your exemptions.
Simon Hase, CPA