Let me share with you a situation that I have seen more than once in my tax practice. As children age into adulthood this situation occurs more and more frequently and can cause a huge headache for parents. What do you do when you have filed a tax return claiming your child as a dependent only to find out that the child has filed her own tax return claiming her own personal exemption?
In the July issue of TaxPro Monthly, contributing author Kevin Brown, EA recounts a situation where a mother had to prove she filed a valid tax return. Leticia’s daughter and grandchild lived with her from January through August and she provided most of their living expenses for that same period. In August the daughter and the grandchild moved out of Leticia’s home to live with the daughter’s boyfriend. Because both the daughter and the grandchild met the tests to be considered as qualifying dependents, Leticia filed her return as head of household and claimed the Earned Income Tax Credit. Unknown to Leticia, after the daughter and the grandchild moved out, the daughter and the boyfriend filed a joint tax return also claiming the Earned income tax credit.
Leticia received one of those dreaded letters from the IRS denying all of the tax benefits of claiming the daughter and grandchild as dependents. In short, Leticia owed the IRS a lot of money.
In the end it was found that Leticia did file a valid tax return. Several factors helped the IRS come to this conclusion. One of most significant of these findings was that the daughter did not file a valid tax return because she and the boyfriend did not meet the tests necessary to file a joint return.
What about college students? This can be tricky. Let’s throw in a child of the college student, and things really get rowdy. Who is a dependent of whom? Who claims what? One of my clients had an 18 year old college student file her own tax return claiming a personal exemption. Because the parents were still taking care of the majority of the students living expenses and she met several other tests, they were able to claim her as a dependent and file an amended return for the student before it became a big issue. It’s nice when problems can be solved so easily.
There are several things to consider before claiming someone as a dependent. Basically you will need to consider the following:
- Marital status of the dependent
- Your relationship to the dependent
- The amount of support you provide to the dependent
- Your income
- The dependents income
- Any support agreements as in the case of separation or divorce
The list goes on. The IRS has a wonderful tool online to help sort through these questions. The quickest way to find it is go to www.IRS.gov and enter “Who Can I Claim as a Dependent” in the search box. The tool will ask a series of specific questions and give the answer at the end. It takes about 15 minutes to complete. It’s worth the time, to not have to deal with cleaning up the mess if you’ve erroneously claimed a non-qualifying person as a dependent on your return.
Also, if you have dependents who may feel entitled to claim their own exemptions on their tax returns, talk about it. Most people do not understand the implications of the information in a tax return, so make sure that your expectations are the same.