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Tax Strategies for the “Sandwich Generation”: Claiming Dependents Young and Old

The aging population and the challenging job market has “sandwiched” middle-aged Americans. As more and more elderly parents outlive their retirement savings
and unemployed college graduates return to the nest, this generation often finds themselves caring for either their adult children or their elderly parents, and sometimes both.

In both cases, the additional financial responsibility can significantly affect family finances. While the financial stress is certainly not the only factor worth considering, a quick review of the dependent exemptions rules may help to alleviate a small portion of that stress.sandwich-generation

In 2013, the personal exemption amount is $3,900, subject to the phase-out limitations beginning at $300,000 for married filing joint returns and $250,000 for single filers. There are two ways to claim a dependency exemption on your tax return, in addition to the personal exemptions for you and your spouse. You may claim an exemption for a “qualifying child” and/or a “qualifying relative,” (i.e. – the adult child and the elderly parent).

There are “tests” to determine the dependency exemption for each type. Before applying these tests, the following criteria must hold true – the potential dependent should be a US citizen, not filing a joint a return and not be eligible to be claimed on another’s tax return.

For a qualifying child, an individual must pass all five tests –

  1. Relationship Test – a child must be your (step-) child, eligible foster child, (step-) sibling, or descendant of the aforementioned.
  2. Age Test – a child must be under the age of 19 at the end of the year OR a student (enrolled for at least 5 months of the year) and under the age of 24 at the end of the year. If a child is permanently or totally disabled there is no age maximum.
  3. Residency Test – a child must live with you for more than half the year. Specific rules exist for children with divorced or separated parents.
  4. Support Test – a child must not have provided more than half of his or her own support. Scholarships are not considered in this test.
  5. Joint Return Test – a child cannot file a joint return for the year.

For a qualifying relative, an individual must pass four tests –

  1. Not a Qualifying Child Test – a relative cannot be considered a qualifying child based on the tests mentioned above.
  2. Relationship Test – a relative must live with you in your house all year. However, the IRS permits certain people related to you to not have to live with you all year:
    1. (step-) child, foster child, (step-) sibling, (step-) parents, grandparents, descendants of the aforementioned.
  3. Gross Income Test – a relative must not have gross income exceeding $3,900 for the year.
  4. Support Test – a relative must not pay more than half of their total support for the year. Total support is calculated by adding costs of food, lodging, clothing, medical, recreation and transportation.

The only way to claim a person as your dependent is if the person is a qualifying child or relative based on the tests above. Each test above can be easily applied to your unique situation and hopefully, help to alleviate a small portion of the liability when experiencing the mid-life crunch. So, if you find yourself caring for your adult children and/or your elderly parents, just ask yourself the questions above to know whether you can claim them on your tax return.

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