Relatives in your basement? Tax break
If you are supporting relatives, including adult children and elderly parents, you can deduct them as dependents. But make sure you follow all the rules.
This post is by Bill Bischoff of SmartMoney.
The most obvious break is being able to claim the supported relative as your tax-return dependent, which allows you to bag a personal exemption deduction. For 2011, the deduction is $3,700. For 2012, it rises to $3,800.
You must meet a number of requirements to collect the write-off.
You must provide more than half the relative's support for the year. If the person lives in your household for free, count his or her share of the rental value of your home as support as well as his or her share of total household expenses for food, utilities and so forth. Figure the relative's share of these indirect costs by dividing them by the number of people in your household. Then add any amounts you spend on direct support -- such as covering the relative's health insurance premiums or car payments. Calculating support can be tricky. (Post continues below video.)
The supported person need not live in your household if he or she is your child; a descendant of your child (such as a grandkid); a brother, stepbrother, half-brother, sister, stepsister, half-sister or a descendent of one of these individuals (such as a niece or nephew); or your son-in-law, daughter-in-law, father, stepfather, father-in-law, mother, stepmother, mother-in-law, brother-in-law, sister-in-law, aunt or uncle.
If you're supporting someone who doesn't fit into any of these relationships, that person can't be claimed as your dependent unless his or her main residence is your household. For example, even though you provide 100% support for a godchild, he or she can't be your tax-return dependent unless you share the same household.
Requirements for deduction
The supported relative's gross income must be under the annual threshold for you to claim a personal exemption deduction for that person on your Form 1040. The threshold for 2011 is $3,700; it's $3,800 for 2012. Helpfully, gross income for this purpose does not include tax-free Social Security benefits.
Note: If the relative in question is child under 19 (or a child under 24 who is a full-time student), the gross income requirement doesn't apply. A supported child who fits one of these descriptions can be your dependent regardless of the child's gross income.
The supported person cannot file a joint Form 1040 with his or her spouse unless the return was filed only to collect a tax refund and neither spouse would have owed tax if they had filed separate returns.
The supported person must be a U.S. citizen, a U.S. resident alien, a U.S. national or a resident of Canada or Mexico.
Multiple support agreement
Say you have a relative who would qualify as your dependent under the preceding rules except for one thing: You don't provide over half of his or her support. Instead, you and one or more other sainted individuals together provide over half of the support. This is a relatively common scenario with an aged parent or disabled adult sibling. But it could also happen with just about any out-of-work relative these days.
Thankfully, you can potentially claim the personal exemption deduction ($3,700 for 2011; $3,800 for 2012) in this situation under the so-called multiple support agreement rules. You must meet the following requirements:
- You and one or more other sainted individuals together pay over half of the relative's support, but no one individual pays over half.
- You pay more than 10% of the relative's support.
- You file Form 2120 (Multiple Support Declaration) with your Form 1040.
On Form 2120, you identify any other individuals who paid more than 10% of the relative's support. You must also list their addresses and Social Security numbers and certify that you have their written permission to claim the deduction for the jointly supported relative. (You can't split the deduction.)
More from SmartMoney and MSN Money:
- 5 ways to avoid an IRS audit
- Tax breaks for all (even top earners)
- Taxes that net a tax deduction
- 6 ways to deduct long-term-care insurance
- Slacker boyfriend may be tax-deductible
VIDEO ON MSN MONEY
The author failed to mention that you do not need to be a relative. You just need to meet the IRS criteria. Good to know since this economy has bred a lot of friends sleeping on couches across the country.
This is f'd up, it keeps saying my post is spam! Meanwhile I am trying to post crucial information the author left out!
This works for gay couples where one makes below the required amount. My husband has a very good job but with a HORRIBLE commute and it pays for me to stay at home and do all the domestics.
We didn't know about this for years but were able to go back 2 years at least when we first found out
talk to a good tax accountant!
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