Tax Tip: How to Secure an 'Extra' Dependency Exemption
by AccountingWEB on
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.
You may like these other stories...
IRS audits less than 1 percent of big partnershipsAccording to an April 17 report from the Government Accountability Office (GAO), the IRS audits fewer than 1 percent of large business partnerships, Stephen Ohlemacher of the...
Legislation coming out of Washington just might reduce homeowners' burden for disaster insurance. It's a topic very much on everyone's minds since the mudslide in Oso, Washington. The loss of human life was...
Divorce is hard, and the IRS isn't going to make it any easier. The IRS generally says "no" to tax deductions that might ease the pain of divorce. In certain circumstances, however, you might be able to salvage...
Upcoming CPE Webinars
Is everyone at your organization meeting your client service expectations? Let client service expert, Kristen Rampe, CPA help you establish a reputation of top-tier service in every facet of your firm during this one hour webinar.
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.