WHEN DEPENDENCY IS A GOOD THING
Lori Z. Bahnmueller
Michigan Credit Union League - Your Money Matters
PLYMOUTH, Mich., March, 1999 — There’s no such thing as too many dependents or being too financially dependent upon when it comes to tax time.
Trouble is, while most filers are apt to claim the obvious dependency exemptions — filer, spouse and children — too few account for other dependency exemptions they’ve earned. And because dependency exemptions reduce your taxable income by $2,700 for 1998, failure to count every eligible dependent is to err in favor of Uncle Sam.
Those with a high taxable income, however, may not partake so generously in dependency exemptions. The phase-out amount depends on your filing status. Exemptions are phased out if adjusted gross income (AGI) in 1998 exceeds $124,500 for single filers, $186,800 for taxpayers filing jointly, and $155,650 for heads of household. The phase-out affects all exemptions that can be claimed on a return.
The Michigan Association of CPAs offers the following strategies for making the most of your dependency exemptions:
When 12 months doesn’t equal a year.
If your child was born on December 31, 1998, you can claim a full year exemption for that child. Similarly, you can claim a full year’s exemption for a dependent who dies at any time during the year, providing the dependency tests are met. Among the test criteria are providing food, lodging, education, medical and dental care, transportation, recreation, clothing and laundry, phone bills and similar necessities.
A whole is better than two halves.
Unless you specifically designate one parent as the recipient of your support, the Internal Revenue Service (IRS) routinely allocates your contribution equally between your parents. Should you furnish less than half of your parents’ total support, try providing support for only
one of them — preferably the one with less income. By making out checks to only that parent, you may become eligible to claim at least one parent as a dependent.
A penny saved is an exemption earned.
In determining how much a potential dependent contributes to his or her support, you should only count money actually spent by the dependent for support — not money available for support. If you’re providing close to half of someone’s support, you might suggest that the person save more and you’ll make additional support payments to meet the support test.
It’s not over, until it’s over.
To protect your dependency exemption for someone for whom you provide support, add up the numbers well before year’s-end. If, for example, you discover that you’re coming up short by a few hundred dollars, you may be able to preserve your exemption by spending (before December 31) an additional sum on items that qualify as support.
Share and share alike.
When two or more persons combine to provide support for a dependent person, and not one of them provides over half of that person’s support, they can agree among themselves to let one of them take the exemption.
This strategy allows anyone who contributes more than 10 percent of the support to claim the dependency exemption as long as more than half the support was contributed by persons who, except for the support test, would be entitled to claim the supported individual as a dependent.
Each year, you can decide who gets the dependency exemption. The others waive their claim to the exemption by signing Form 2120. The person claiming the exemption attaches the forms to his return.
All’s fair in marriage and divorce.
Usually a divorced or separated parent who has custody of a child for the greater portion of the year is entitled to claim the dependency exemption for the child. This is the case whether
or not that parent actually provided more than half of the child’s total annual support.
If the non-custodial parent is in a higher tax bracket and so could benefit more, the two parents can work out an arrangement to transfer the exemption. To do this, the custodial parent must sign Form 8332 releasing the exemption to the non-custodial parent who attaches this form to his tax return for each year the exemption is released.
Call in for free tax advice on March 20.
In this spirit of the tax season, the Michigan Association of Certified Public Accountants is offering filers an opportunity to get free tax advice from the experts. Befuddled, puzzled or uncertain about a state or federal income tax law, dial toll free 1-800-420-4CPA on Saturday, March 20. Volunteer CPAs will be available from 9 a.m. to 4 p.m. The program is completely free of charge. Participants may call as often as they wish, but are asked to limit their inquiry to one or two questions per call.