Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SATURDAY, February 15, 1992 TAG: 9202150059
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Long
TO CLAIM DEPENDENTS, THEY MUST MEET CERTAIN GUIDELINES
There was a time when having a child could just about wipe out your federal income tax liability. Now, a child is worth a tax saving of only $322.50 for the average American.As a general rule, each dependent claimed allows $2,150 of 1991 earnings to escape tax. A child under the age of 19 may be claimed as a dependent by a taxpayer who provided more than half his or her support last year.
But then come a lot of exceptions and qualifications: Is the dependent a student? Married? Filing a return? And remember that if your income is high enough, the value of your exemptions is reduced and eventually eliminated.
To be claimed as a dependent, a person must meet five tests:
Relationship. He or she must have lived with you throughout 1991 except for being temporarily absent because of school, military service, vacation or illness, or must be a relative. That can be a child, grandchild, stepchild, parent, grandparent, brother, sister, uncle, aunt, nephew, niece or in-law. A live-in lover counts in some states, but not in Virginia where state code makes such situations illegal.
Income. In general terms, a dependent must have had 1991 gross income under $2,150. That does not include tax-exempt income, such as welfare benefits and the non-taxable part of Social Security. Is the dependent your child? Then there is no income limit if he or she was under 19 at the end of 1991, or was a full-time student and under 24 at year end. Full-time means a full class load for at least five months of the year. A government-supervised on-farm training course also counts.
Citizenship. The dependent must be a U.S. citizen or resident alien or a resident of Mexico or Canada.
No joint return. You may not claim an exemption for any person who files a joint return with someone else.
Support. You must have provided more than half the dependent's financial support last year. This includes food, shelter, clothing, transportation, medical expenses, education, child-care services, recreation and spending money. Insurance premiums, scholarships or Social Security or income taxes that you paid for the person do not count as support.
If you and someone else - a sister, for example - combine to pay more than half the support of a dependent - such as an elderly parent - but nobody alone pays more than half, you may claim the full exemption by contributing more than 10 percent. The others then must sign Form 2120, a Multiple Support Declaration, giving up their right to the exemption.
A divorced parent who does not have custody of a child may take an exemption if the other parent agrees in writing to give up the claim, or if the claim was authorized by a pre-1985 court order or agreement. Read IRS Publication 504 for details.
You begin losing any tax saving from personal exemptions once your adjusted gross income exceeds a certain level. For 1991, the benefit for a single person begins dropping after adjusted gross income passes $100,000; for a couple filing jointly, the threshold is $150,000; for a head of household, it is $125,000.
You lose 2 percent ($43) of your $2,150 exemption for each $2,500 of adjusted gross income above the threshold. For example, a single person with no dependents and adjusted gross income of $171,000 would get an exemption of $903. A couple with one child and filing jointly would get three exemptions totaling $5,934, rather than $6,450.
If your income is above the threshold, calculate your allowable exemptions on the worksheet on page 24 of your Form 1040 instructions.
A different set of tax rules applies if you have dependent children with income of their own.
For one thing, a dependent child who has any investment income is allowed a standard deduction of no more than $550, rather than the $3,400 that generally applies to a single person.
Second, a child who can be claimed as a dependent by a parent or someone else is denied the usual $2,150 personal exemption.
Then there is something called the "kiddie tax," which was designed to discourage parents from avoiding taxes by splitting investment income with a child, who usually pays a lower tax rate.
The kiddie tax could affect you if your child was under age 14 at the end of 1991. It means the child's unearned income - such as interest, dividends or capital gains - over $1,100 must be taxed at your own top rate, assuming that is higher than the child's rate.
This tax is calculated on Form 8615, which is filed in the name of the child.
If the child's total income was between $501 and $4,999 and solely from interest and dividends, you may include that income on your own return rather than file a separate return for the child. In this case, attach Form 8814 to your return.
Unless doing your children's returns involves a significant amount of work, you probably will be better off not taking this option. It could raise your family's total tax bill.
Adding your child's income onto your return will raise your adjusted gross income and could reduce any deduction you claim for medical expenses, contributions to Individual Retirement Accounts and miscellaneous job-related expenses. If your income is high enough, it also could subject you to the new phaseout of personal exemptions and the limitation on itemized deductions.
The "kiddie tax" applies only to investment income - not to money your child earns mowing lawns, delivering newspapers, baby-sitting or performing any other services.