Tax Tip: How to Secure an 'Extra' Dependency Exemption

By Ken Berry

 
Why should clients use your tax return preparation services instead of finding a tax software program online? Even in this era of do-it-yourself technology, you can provide valuable insights that individual taxpayers simply can't get from standard software. Your "pitch" is obvious: The small amount the client will pay for your services will likely be far outweighed by the extra tax savings you can detect.
 
What sort of tax benefits are we talking about? Of course, every situation is different, but we've assembled a group of ten timely tax tips that your clients might easily miss or overlook. Here's the first in our series for the 2011 tax return season.
 
Tip 1: Secure an "Extra" Dependency Exemption 
 
If the relative's annual gross income exceeds the personal exemption amount, the client can't claim an exemption for the relative, even if he or she meets the half-support test.
Most clients are familiar with claiming dependency exemptions for children who are still living at home. It's a no-brainer: A parent can take an annual exemption ($3,700 on 2011 returns) for every child under age nineteen, or a full-time student under age twenty-four, as long as the parent provides more than half of the child's support.
 
But it's a thornier proposition when someone helps support an elderly relative, a pretty common occurrence these days. In that case, the client must also meet the "gross income test." If the relative's annual gross income exceeds the personal exemption amount, the client can't claim an exemption for the relative, even if he or she meets the half-support test.   
 
Note that gross income doesn't include tax-free income generated by municipal bonds. Even more significant: Although Social Security benefits used for support count toward the half-support test, they do not count as gross income for this purpose.
 
For example, suppose your client provided $15,000 in support to his elderly mother in 2011. Mom earned $2,500 in taxable investment income, $1,000 in tax-free income, and $10,000 in Social Security benefits. The client provided more half of Mom's annual support ($15,000 to $13,500), but what about the gross income test? Because Social Security benefits don't count as gross income, Mom's taxable income of $2,500 doesn't exceed the exemption amount of $3,700. Tax return payoff: Your client can claim an extra 2011 dependency exemption for Mom. 


See the whole series of Ken Berry's tax tips for the 2012 filing season
  1. How to Secure an 'Extra' Dependency Exemption
  2. Choose the 'Biggest and Best' State Tax Deduction
  3. Lock in Mortgage Interest Deductions for Points
  4. Generate Energy Credits for Clients
  5. Dish Out Tax Rewards to Charitable Volunteers
  6. A Party at Home? That's (Deductible) Entertainment!
  7. Spell Out Tax Rules for Business Education
  8. Add on Medical Expenses for a Nondependent
  9. How Do You Spell Tax Relief? C-a-s-u-a-l-t-y Loss
  10. Expand the Reach of Dependent Care Credit


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