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Introduction to the Exemption for Dependents for parents of children with disabilities.
Under the Internal Revenue Code, a certain portion of your income is exempt from tax because some income is necessary just to supply the means of living. In 2017, the amount was $4,050. A taxpayer is entitled to an exemption for one's self, the spouse and each dependent. If the taxpayer pays taxes at 25% to 28%, each exemption claimed results in a tax lower by about $1,000. Thus, it is important for your children to qualify as dependents for your tax return. Also, the presence of a dependent may allow a taxpayer to pay under the lower Head-of-Household" rate. 26 USC 1(b), 2(b). The subject of this page is the rule to qualify as a dependent and how the rule applies to a disabled child drawing governmental benefits.
August 2018 update: The new tax eliminated exemptions, thus squeezing taxpayers who took care of adults with disabilities. Under the prior tax system, in the example above, if a son in the 25% bracket got a full personal exemption for a parent he supported last year, that writeoff saved about $1,000 in tax. The exemption was replaced with a $500 credit (for dependents above the age of 17), which is only half the previous tax reduction. In August 2018 the Internal Revenue Service clarified an issue that further threatened to squeeze caretakers. Under prior law, the person being supported -the dependent- was allowed to have gross income up to the amount of the personal exemption and the caretaker could still claim the relative as a dependent. The repeal of the personal exemption created confusion as to the amount of income limit. In its clarification, the IRS said the dependent relative would be allowed to have income equal to what the personal exemption would have been, after inflation. For 2018, the limit is $4,150.
- Please do not use this article as definitive advice, as your situation may vary. Consult your attorney or tax professional.
- Definitions of which children qualify as dependents also change from year to year, so always check the latest information.
- Nothing on this page creates an attorney-client relationship.
- 2018 Update: Under the 2018 tax code, for the tax returns due in April 2019, the exemption amount is Zero. Thus, there may few benefits in determining if your child qualifies as a dependent. However, the test for qualifying as a dependent may still be relevant for other reasons, for college tuition credits, the head of household definition, or even the qualification for some types of health plans. You may have to adjust your withholding to reduce you allowances and increase the amount withheld from your paycheck. Even the experts are trying to figure the new tax law.
Section 152 of the Internal Revenue Code states:
A qualifying child means an individual who:
Bears a qualifying relationship to the taxpayer (e.g., a child of the taxpayer); - has the same principal place of abode as the taxpayer for more than one-half of the taxable year;
- meets the age requirement of section 152(c)(3);
- has not provided over one-half of his or her own support for the taxable year; and
- has not filed a joint return with his or her spouse, if any.
The rules for a qualified relative other than a child are a little different and are discussed later. The first goal is to meet all five of these tests.
The age requirement of part 3 can be met in any of these ways:
- under age 19 at the end of the year, or
- under age 24 and a be a full-time student for at least five months out of the year, or
- any age and totally and permanently disabled.
The tricky part is the support test (#4): the child must not have provided over one half of his or her own support during the year when that child is collecting government benefits. When a disabled child reaches the age of 18, and has few assets and little income, he may qualify for SSI. If he has enough work experience, he may qualify for SSDI without checking his income. However, SSI benefits will be reduced if he gets in-kind support, such as free room and board from his parents. Generally, SSI benefits will not be reduced if he pays rent, which shows he is not getting support, but instead paying for his support. Thus, most parents tending for adult child with disabilities living at home charge the child a fair-share assessment of the household expenses. For example, the parents total the amount of rent, food, utilities and other expenses, and, if a family of four, divide the total by four to obtain the fair-share amount. The payment of the fair share amount generally prevents a reduction in SSI benefits.
This solution leads to the dilemma: If the child is providing support, can the parents meet the support test to claim an exemption for the disabled adult child? The IRS provides some guidance in its Publications 17 and 501.
Recently, the IRS provided a look at how to apply the test in a tax court summary opinion,
Santos v. Commissioner of Internal Revenue
, T.C. Summary Opinion 2011-108. The opinion is not a precedent, and thus is not binding on any other case. The results in any situation will depend on all the individual facts there. In
Santos
, the taxpayer totaled her household expenses for mortgage, property taxes, food, utilities, etc, as $26,783, and thus $13,305 was deemed to be the amount of support she supplied her son. Her son, who was disabled collected $5,420 from Social Security. Since the $5,430 was less than $13,305, he did not supply half of his support, even if the court could rule whether the Social Security benefits could be treated as support he supplied, an issue the court did not decide. The court did decide in
Santos
that it would be unfair to include Medicaid payments as part of his support. Thus, the taxpayer was entitled to claim her son as a dependent. The court also noted a taxpayer is not precluded from being entitled to a dependency exemption simply because she is not able to prove conclusively the total cost of the child's support
The IRS provides the formula:
To figure if you provided more than half of a person's support, you must first determine the total support provided for that person. Total support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities.
Generally, the amount of an item of support is the amount of the expense incurred in providing that item. For lodging, the amount of support is the fair rental value of the lodging.
Expenses that are not directly related to any one member of a household, such as the cost of food for the household, must be divided among the members of the household.
Lodging
. If you provide a person with lodging, you are considered to provide support equal to the fair rental value of the room, apartment, house, or other shelter in which the person lives. Fair rental value includes a reasonable allowance for the use of furniture and appliances, and for heat and other utilities that are provided.
Fair rental value defined . This is the amount you could reasonably expect to receive from a stranger for the same kind of lodging. It is used instead of actual expenses such as taxes, interest, depreciation, paint, insurance, utilities, cost of furniture and appliances, etc. In some cases, fair rental value may be equal to the rent paid. If you provide the total lodging, the amount of support you provide is the fair rental value of the room the person uses, or a share of the fair rental value of the entire dwelling if the person has use of your entire home. If you do not provide the total lodging, the total fair rental value must be divided depending on how much of the total lodging you provide. If you provide only a part and the person supplies the rest, the fair rental value must be divided between both of you according to the amount each provides.
Using the formula in the Santos case can provide a good-faith estimate of whether you are providing over half your child's support such that you can claim her or him as a dependent on your tax return. Each case will be different, and Santos is not binding on the government, so always be accurate in your records and calculations.
Your child in a group home or CILA
As your child with a disability grows older, she may qualify for placement in a group home or CILA. If she moves out of your home, she will no longer pass the residency test of a dependent child since she will not live in your home more than 50% of the year, and her absence is not temporary, such as for hospitalization or education. The Internal Revenue Code does provide another way to qualify for an exemption, the Qualifying Relative. This category is more expansive than the Qualify Child test, and can include other family members or relations, including your aged parents. A child cannot be your qualifying relative if she is your "qualifying child" (see above) or the qualifying child of any other taxpayer. Since the test does not include residency in your home, you may be able to include your child or parents who have their own home. While there are more descriptions of this exemption, this article is directed at parents of children with disabilities. Whether this exemption applies depends mainly on who is funding the placement in the group home. Query: by providing support, will you disqualify your child from public benefits? Assuming your relative meets the household or relationship test, to get the exemption, your relative must meet both the Gross Income test and the Support test.
Gross Income Test
To meet this test, which applies to qualifying relatives, a person's gross income for the year must be less than the exemption amount, which in 2017 is $4,050.
- Gross income is all income in the form of money, property, and services that is not exempt from tax.
- Tax-exempt income, such as certain social security benefits (SSI for example), is not included in gross income.
- The gross income of an individual who is permanently and totally disabled at any time during the year does not include income for services the individual performs at a "sheltered workshop."
To meet this test, which applies to qualifying relatives, a person's gross income for the year must be less than the exemption amount, which in 2017 is $4,050.
- Gross income is all income in the form of money, property, and services that is not exempt from tax.
- Tax-exempt income, such as certain social security benefits (SSI for example), is not included in gross income.
- The gross income of an individual who is permanently and totally disabled at any time during the year does not include income for services the individual performs at a "sheltered workshop."
Support Test (To Be a Qualifying Relative)
- To meet this test, you generally must provide more than half of a person's total support during the calendar year.
- A person's own funds are not support unless they are actually spent for support. (If some income is put into savings, it was not spent "for support")
- If a child receives social security benefits and uses them toward his or her own support, the benefits are considered as provided by the child.
- Benefits provided by the State (welfare, food stamps, housing, etc.) to a needy person generally are considered support provided by the State.
You must figure whether you have provided more than half of a person's total support by comparing the amount you contributed to that person's support with the entire amount of support that person received from all sources. This includes support the person provided from his or her own funds.
While Santos noted that "payments received under Medicaid are not necessarily included in determining the support of a claimed dependent," another court may not rule the same way, especially if Medicaid is the entity paying the cost of the group home. This question remains open.
- To meet this test, you generally must provide more than half of a person's total support during the calendar year.
- A person's own funds are not support unless they are actually spent for support. (If some income is put into savings, it was not spent "for support")
- If a child receives social security benefits and uses them toward his or her own support, the benefits are considered as provided by the child.
- Benefits provided by the State (welfare, food stamps, housing, etc.) to a needy person generally are considered support provided by the State.
You must figure whether you have provided more than half of a person's total support by comparing the amount you contributed to that person's support with the entire amount of support that person received from all sources. This includes support the person provided from his or her own funds.
While Santos noted that "payments received under Medicaid are not necessarily included in determining the support of a claimed dependent," another court may not rule the same way, especially if Medicaid is the entity paying the cost of the group home. This question remains open.
Total Support
To figure if you provided more than half of a person's support, you must first determine the total support provided for that person.
- Total support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities.
- In figuring a person's total support, include tax-exempt income, depleting savings, and borrowed amounts used to support that person. Tax-exempt income includes certain social security benefits, welfare benefits, nontaxable life insurance proceeds, Armed Forces family allotments, nontaxable pensions, and tax-exempt interest.
- Generally, the amount of an item of support is the amount of the expense incurred in providing that item. For lodging, the amount of support is the fair rental value of the lodging. Expenses not directly related to any one member of a household, such as the cost of food for the household, must be divided among the members of the household.
- Relatives who do not have to live with you for the Qualifying Relative exemption.
A person related to you in any of the following ways does not have to live with you all year as a member of your household to meet this test.Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.)
- Your brother, sister, half brother, half sister, stepbrother, or stepsister.
- Your father, mother, grandparent, or other direct ancestor, but not foster parent.
- Your stepfather or stepmother.
- A son or daughter of your brother or sister.
- A son or daughter of your half brother or half sister.
- A brother or sister of your father or mother.
- Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
Any of these relationships that were established by marriage are not ended by death or divorce.
How will this exemption survive in 2018? Maybe not at all. If the gross income test uses an amount of $0.00, can anyone qualify as a qualifying relative? And does it matter, since the amount that the taxpayer can deduct is down to zero anyway.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
To figure if you provided more than half of a person's support, you must first determine the total support provided for that person.
- Total support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities.
- In figuring a person's total support, include tax-exempt income, depleting savings, and borrowed amounts used to support that person. Tax-exempt income includes certain social security benefits, welfare benefits, nontaxable life insurance proceeds, Armed Forces family allotments, nontaxable pensions, and tax-exempt interest.
- Generally, the amount of an item of support is the amount of the expense incurred in providing that item. For lodging, the amount of support is the fair rental value of the lodging. Expenses not directly related to any one member of a household, such as the cost of food for the household, must be divided among the members of the household.
- Relatives who do not have to live with you for the Qualifying Relative exemption.
A person related to you in any of the following ways does not have to live with you all year as a member of your household to meet this test.Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.)
- Your brother, sister, half brother, half sister, stepbrother, or stepsister.
- Your father, mother, grandparent, or other direct ancestor, but not foster parent.
- Your stepfather or stepmother.
- A son or daughter of your brother or sister.
- A son or daughter of your half brother or half sister.
- A brother or sister of your father or mother.
- Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
Any of these relationships that were established by marriage are not ended by death or divorce.
How will this exemption survive in 2018? Maybe not at all. If the gross income test uses an amount of $0.00, can anyone qualify as a qualifying relative? And does it matter, since the amount that the taxpayer can deduct is down to zero anyway.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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