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How to Safeguard Dependency Tax Exemptions at the Last Minute

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Dec 2nd 2014
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Do you assist in the support of someone who’s partly self-sufficient, such as a retired parent or other relative who receives Social Security benefits or funds from other sources? Then you need to familiarize yourself with tricky rules for dependency exemptions. Who pays which expenses determines whether you’re able to garner an exemption that lowers your taxable income by $3,950 for 2014. Don't let inattention to spending on support cause you to forfeit an exemption needlessly.

To claim a parent as a dependent for 2014, the key requirement is that you provide more than half of his or her total support for the year or, under a multiple support agreement, more than 10 percent. Another stipulation sets a cap of $3,950 on the amount of reportable income that a parent is allowed to receive, not counting funds from tax-exempt sources like Social Security, loans, life insurance proceeds, inheritances, and gifts.

Different, frequently misunderstood, regulations apply when you tally the total spent by you and, for example, your father on support items like his food, rent, or clothing. The law requires you to count all the money that he puts up from his own resources. It makes no difference that the money he spends on himself comes from Social Security or some other tax-free source that needn’t be counted toward that reportable-income ceiling of $3,950.

But the support test doesn’t require you to count what he saves or invests as spending by him for his support. It requires only that you count money actually spent by him for support, not money available for that purpose. So if your father receives untaxed money, you might have to keep close tabs on how much each of you spends between now and the close of 2014. In that event, make sure you’re the one who provides over half of his support by Dec. 31; otherwise, say sayonara to his exemption.

Frequently, there’s just a small difference between your own and your father's contribution to his total support. In some situations, it might prove possible to satisfy the support requirement by asking him to save some money or to spend some of it on nonsupport items like gifts to grandchildren, while you boost your aid for the balance of 2014.

To illustrate, assume the total support outlay for your father comes to $18,000. The breakdown of the $18,000 is that he receives and spends $9,200 from Social Security and other untaxed sources and you put up $8,800. With those numbers, you’re unable to claim him. The hitch is that your contribution runs to less than half of his support. To provide more than half his support for 2014, you need to decrease his spending or boost your help, or both. The solution? Simply ask him to put more than $400 of his available $9,200 in the bank for the rest of the year, rather than spend it, or increase your support spending by enough to surpass what he spends. Either tactic enables you to pass the support test, thereby keeping the exemption.

There’s a last-minute maneuver that can help if your father's support contributions appear to be outpacing yours as the year nears its end. In calculating what you spend on support during the year, include the cost of items that you provide by Dec. 31, even though you hold off paying for them until next year—say, a Christmas gift that you pay for with a check sent in January.

About the author:

Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from “Julian Block’s Year Round Tax Strategies,” available at julianblocktaxexpert.com.

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