liberty tax course chapter 2 2009

Liberty Tax ServiceLiberty Tax Service
Basic Income Tax CourseBasic Income Tax Course
CLASS TWOCLASS TWO

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Chapter 1 HomeworkChapter 1 Homework
HOMEWORK 1HOMEWORK 1: Use the appropriate Filing Requirement: Use the appropriate Filing Requirement
Table to determine who has to file. Yes or No.Table to determine who has to file. Yes or No.
1.1. Ed’s filing status is single and in 2008 he was 54 years old.Ed’s filing status is single and in 2008 he was 54 years old.
His gross income was $8,440 and he has withholding ofHis gross income was $8,440 and he has withholding of
$450.$450. N (But he should because taxes have been withheld)N (But he should because taxes have been withheld)
2.2. Jane’s filing status is qualifying widow(er) with dependentJane’s filing status is qualifying widow(er) with dependent
child. She was 42 years old in 2008 and her gross incomechild. She was 42 years old in 2008 and her gross income
was $13,350.was $13,350. NN
3.3. Dick and Sally’s filing status is married, joint return. DickDick and Sally’s filing status is married, joint return. Dick
was 68 and Sally was 61 years old in 2008. Their grosswas 68 and Sally was 61 years old in 2008. Their gross
income was $17,820income was $17,820 NN
4.4. Sam’s filing status is head of household. He was 29 yearsSam’s filing status is head of household. He was 29 years
old in 2008 and his gross income was $11,550.old in 2008 and his gross income was $11,550. YY
5.5. Terry (single, age 17 in 2008) is claimed as a dependent byTerry (single, age 17 in 2008) is claimed as a dependent by
her parents. Her gross income was $5,550.her parents. Her gross income was $5,550. YY
6.6. Rufus (age 70 in 2008) is single and his son can claim himRufus (age 70 in 2008) is single and his son can claim him
as a dependent. His only income was $2,250 in bankas a dependent. His only income was $2,250 in bank
interest.interest. YY

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HOMEWORK 1HOMEWORK 1: Use the appropriate Filing Requirement Table to: Use the appropriate Filing Requirement Table to
determine who has to file. Yes or No.determine who has to file. Yes or No.
7.7. Sonia (age 67 in 2008) is single, received nontaxable socialSonia (age 67 in 2008) is single, received nontaxable social
security of $9,000 and made $750 net from selling Christmassecurity of $9,000 and made $750 net from selling Christmas
ornaments at craft shows.ornaments at craft shows. YY
8.8. Barbara (single, age 16 in 2008) can be claimed by her parentsBarbara (single, age 16 in 2008) can be claimed by her parents
as a dependent. In 2008, Barbara earned wages of $480 as aas a dependent. In 2008, Barbara earned wages of $480 as a
dishwasher and $620 from her job as a clerk. She also had adishwasher and $620 from her job as a clerk. She also had a
savings account, which earned interest of $300.savings account, which earned interest of $300. NN
9.9. Barry (single, age 17 in 2008) can be claimed by his parents as aBarry (single, age 17 in 2008) can be claimed by his parents as a
dependent. In 2008, Barry earned wages of $5,150 working at adependent. In 2008, Barry earned wages of $5,150 working at a
fast food restaurant and he had no other income.fast food restaurant and he had no other income. NN
10.10. Jackie was married in 2008 but chose the filing status married,Jackie was married in 2008 but chose the filing status married,
separate return. In 2008, she had a gross income of $3,500.separate return. In 2008, she had a gross income of $3,500. YY
11.11. Len and Marge (ages 69 and 70 in 2008) will file a married jointLen and Marge (ages 69 and 70 in 2008) will file a married joint
return. Len received wages of $10,500 and Marge received areturn. Len received wages of $10,500 and Marge received a
taxable pension of $7,000. They had a joint bank account, whichtaxable pension of $7,000. They had a joint bank account, which
paid them interest of $2,000 and Marge received $2,500 socialpaid them interest of $2,000 and Marge received $2,500 social
security.security. NN
12.12. Lorna (age 23 in 2008) is married but can be claimed as aLorna (age 23 in 2008) is married but can be claimed as a
dependent by her parents. Her earned income (wages) in 2008dependent by her parents. Her earned income (wages) in 2008

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HOMEWORK 2HOMEWORK 2: None of the following taxpayers can be claimed as a: None of the following taxpayers can be claimed as a
dependent. What is the gross income level at which each must filedependent. What is the gross income level at which each must file
a return?a return?
1.1. Married (living together), joint return, both age 65 in 2008.Married (living together), joint return, both age 65 in 2008.
$20,000$20,000
2.2. Married (living together), joint return, both age 63 in 2008.Married (living together), joint return, both age 63 in 2008.
$17,900$17,900
3.3. Head of household, age 65 in 2008.Head of household, age 65 in 2008. $12,850$12,850
4.4. Qualifying Widow(er) with dependent child, age 64 in 2008.Qualifying Widow(er) with dependent child, age 64 in 2008.
$14,400$14,400
5.5. Single, age 23 in 2008.Single, age 23 in 2008. $8,950$8,950
6.6. Married, separate return, age 65 in 2008.Married, separate return, age 65 in 2008. $3,500$3,500
7.7. Single, turned age 65 on January 1, 2009.Single, turned age 65 on January 1, 2009. $10,300$10,300
8.8. Married (living together), joint return, one spouse age 67 andMarried (living together), joint return, one spouse age 67 and
one spouse age 58 in 2008.one spouse age 58 in 2008. $18,950$18,950
9.9. Head of household, age 19 in 2008.Head of household, age 19 in 2008. $11,500$11,500
10.10. Single, age 87 in 2008.Single, age 87 in 2008. $10,300$10,300

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HOMEWORK 3HOMEWORK 3::
Joshua S. Scott, (344-55-6677, born 3/16/1959) is single and lives at 1566Joshua S. Scott, (344-55-6677, born 3/16/1959) is single and lives at 1566
Piney Road, Mason City, IA 50401. He is a steel worker and his Form W-2Piney Road, Mason City, IA 50401. He is a steel worker and his Form W-2
follows. He has no other income. Prepare a 2008 return for him.follows. He has no other income. Prepare a 2008 return for him.

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Chapter 2: EXEMPTIONS ANDChapter 2: EXEMPTIONS AND
DEPENDENTSDEPENDENTS
Chapter Content
 Personal Exemptions
 Dependent Exemptions
 Five Qualifying Child Tests
 Four Qualifying Relative Tests
 Exemption Phase-out
 Key Ideas
Objectives
 Understand the Types of Exemptions
 Define the Qualifying Child Tests
 Define the Qualifying Relative Tests
 Understand the Phase-out of Exemptions

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1. Exemptions reduce taxable income.
2. Two types of exemptions:
a) Personal exemptions
b) Exemptions for dependents.
3. Dollar amount adjusted each year for inflation.
The exemption amount for 2008 is $3,500.
4. Each person claimed as an exemption must
have a valid social security number or other
valid taxpayer identification number.
EXEMPTIONSEXEMPTIONS

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EXEMPTIONSEXEMPTIONS
Form 1040 Page 1

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PERSONAL EXEMPTIONS
Generally, ONE exemption can be claimed for yourself
unless you can be claimed as a dependent by
someone else.
Rules for your spouse:
1. Never considered your dependent.
2. Can claim ONE exemption for your spouse if filing
MFJ.
3. If filing MFS, you can claim ONE exemption for your
spouse only if spouse has no gross income, filed no
tax return, and was not the dependent of another
taxpayer.
4. If you are divorced or legally separated by the end
of the tax year, you cannot claim former spouse as
exemption.
5. If spouse died during the year, you can generally
claim the exemption for deceased spouse.

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EXEMPTIONS FOR DEPENDENTS
You are allowed ONE exemption for each person you can
claim as a dependent. The term dependent means a
qualifying child or a qualifying relative.

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RULES FOR CLAIMING A DEPENDENT
Dependent Taxpayer Test
Person cannot claim a dependent if they can be
claimed as a dependent by another person.
A person filing a joint return and their spouse can be
claimed as a dependent by someone else cannot
claim any dependents on their return.
Joint Return Test
Generally you cannot claim a married person as a
dependent if he or she files a joint return. Unless
the joint return is being filed only to claim a
refund and not tax liability would exist for either
spouse on separate returns.
Citizen or Resident Test
A person cannot be claimed as a dependent unless
that person is a U.S. citizen, U.S. resident, U.S.
national, or a resident of Canada or Mexico, for
some part of the year.

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JOINT RETURN TEST – PROBLEM 1JOINT RETURN TEST – PROBLEM 1
Slade’s son and his wife each had less than $3,500
of wages and no unearned income. Neither is
required to file a tax return. Taxes were taken
out of their pay, so they filed a joint return to
get a refund. Is Slade disqualified from claiming
their exemptions just because they filed a joint
return?
Yes or No?

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JOINT RETURN TEST – PROBLEM 1JOINT RETURN TEST – PROBLEM 1
Slade’s son and his wife each had less than $3,500
of wages and no unearned income. Neither is
required to file a tax return. Taxes were taken
out of their pay, so they filed a joint return to
get a refund. Is Slade disqualified from claiming
their exemptions just because they filed a joint
return?
No
Slade is not disqualified from claiming their
exemptions just because they filed a joint
return.

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QUALIFYING CHILD
The FIVE TESTS must ALL be met for a child to
be your qualifying child. The five tests are:
1. Relationship
2. Age
3. Residency
4. Support
5. Special test for qualifying child of more
than one person

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QUALIFYING CHILD
Relationship Test (Test 1)
1. Person must be your son, daughter, stepchild,
eligible foster child, or a descendant of any of
them, or brother, sister, half brother, half sister,
stepbrother, stepsister, or a descendant of any
of any of them.
2. An adopted child is always treated as your own
child. The term adopted child includes a child
who was lawfully placed with you for legal
adoption.
1. An eligible foster child is an individual who is
placed with you by an authorized placement
agency or by judgment, decree, or other order of
any court of competent jurisdiction.

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QUALIFYING CHILD
Age Test (Test 2)
1. Person must be under age 19 at the end of the
year.
2. A full-time student under age 24 at the end of
the year (To qualify, your child must be a
student during some part of each of any 5
calendar months of the year).
3. Permanently and totally disabled at any time during
the year, regardless of age.

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AGE TEST – PROBLEM 2AGE TEST – PROBLEM 2
Beth’s son turned 19 on November 30. He was
not disabled or a full-time student. Does he
meet the age test?
Yes or No?Yes or No?

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AGE TEST – PROBLEM 2AGE TEST – PROBLEM 2
Beth’s son turned 19 on November 30. He was
not disabled or a full-time student. Does he
meet the age test?
No
Beth’s son does not meet the age test because
at the end of the year he was not UNDER
age 19.

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QUALIFYING CHILD
Residency Test (Test 3)
1.Person must have lived with you for more than half
of the year. Exceptions apply for temporary
absences, children who were born or died during the
year, kidnapped children, and children of divorced or
separated parents.
2.A person is considered to have lived with you during
periods of time when you, or both, are temporarily
absent due to special circumstances such as illness,
education, business, vacation, or military service.
3.A child who was born or died during the year is
treated as having lived with you all year if your home
was the child’s home the entire time he or she was
alive during the year.

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QUALIFYING CHILD
Residency Test (Test 3)
4.A child will be treated as a qualifying child of his or
her noncustodial parent if all of the following apply.
a. The parents are divorced or legally separated under a
decree of divorce or separate maintenance, are
separated under a written separation agreement, or
lived apart at all times during the last 6 months of
the year.
b. The child received over half of his or her support for
the year from the parents.
c. The child is in the custody of one or both parents for
more than half of the year.
d. A decree or separate maintenance or written
separation agreement that applies to 2008 provides
that the noncustodial parent can claim the child as a
dependent or the custodial parent signs a written
declaration (such as Form 8332) that he or she will
not claim the child as a dependent for the year.

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RESIDENCY TEST – PROBLEM 3RESIDENCY TEST – PROBLEM 3
Charles and Ellen Roper are divorced. Ellen
has custody of their child, Erika. They both
provide all the support for their daughter.
Ellen is giving Charles the exemption for
Erika. What form must Charles must attach
to his return?
a) Form 8879
b) Form 8332
c) Form 8453

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RESIDENCY TEST – PROBLEM 3RESIDENCY TEST – PROBLEM 3
Charles and Ellen Roper are divorced. Ellen has
custody of their child, Erika. They both provide
all the support for their daughter. Ellen is
giving Charles the exemption for Erika. What
form must Charles must attach to his return?
b) Form 8332

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QUALIFYING CHILD
Support Test (Test 4)
To meet this test, the child cannot have provided
more than half of his or her own support for the
year. This test is different from the support test
to be a qualifying relative, which is described
later.

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QUALIFYING CHILD
Special Test for qualifying child of more than
one Person (Test 5)
1. If a child meets the relationship, age, residence, and
support test to be a qualifying child of more than one
person, only one person can actually treat the child
as a qualifying child.
2. If you and the other person cannot agree on who will
claim the child and more than one person files a
return with the same child, the IRS will disallow all
but one of the claims using the tie-breaker rules.
Note: If your qualifying child is not a qualifying child for
anyone else, this test does not apply to you.

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QUALIFYING CHILD
Table 2-2. When More Than One Person Files a Return Claiming the Same Qualifying Child (Tie-Breaker Rule
Caution. If a child is treated as the qualifying child of the noncustodial parent under the rules for children of
divorced or separated parents, see Applying this special test to divorced or separated parents.
IF more than one person files a return
claiming the same qualifying child and . . .
THEN the child will be treated as the
qualifying child of the. . .
only one of the persons is the child's parent, parent.
two of the persons are parents of the child and
they do not file a joint return together,
parent with whom the child lived for the longer
period of time during the year.
two of the persons are parents of the child, they
do not file a joint return together, and the child
lived with each parent the same amount of time
during the year,
parent with the higher adjusted gross income
(AGI).
none of the persons are the child's parent, person with the highest AGI.

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Applying this special test to
divorced or separated parents.
If a child is treated as the qualifying
child of the noncustodial parent under
the rules for divorced or separated
parents described earlier, the
noncustodial parent can claim an
exemption and the child tax credit for
the child. But the noncustodial parent
cannot claim the child as a qualifying
child for head of household filing
status, the credit for child and
dependent care expenses, or the
earned income credit.
QUALIFYING CHILD

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If the child is the qualifying child of
more than one other person, ONLY
one of those persons can claim the
child as a qualifying child for head of
household filing status, the credit for
child and dependent care expenses,
and the earned income credit.
No other person can claim any of these
three tax benefits unless he or she
has a different qualifying child. If you
and any other person file a return
claiming the child as a qualifying child
for any of these tax benefits, the IRS
will disallow all but one of the claims
using the tiebreaker rule in Table 2-2.

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QUALIFYING RELATIVE
The FOUR TESTS must ALL be met for you to
claim an exemption for a person to be your
qualifying relative.
The four qualifying relative tests are:
1. NOT a qualifying child test,
2. Member of household or relationship test,
3. Gross income test, and
4. Support test.

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QUALIFYING RELATIVE
Not a Qualifying Child Test (Test 1)
A child cannot be your qualifying relative if the child
is your qualifying child or the qualifying child of
any other taxpayer.
Example: Your 2-year-old son lives with your
parents and meets all the tests to be their
qualifying child. He is not your qualifying
relative.

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Qualifying Relative
An individual is not a qualifying child of “any other taxpayer”An individual is not a qualifying child of “any other taxpayer”
if the individual’s parent (or other person with respect toif the individual’s parent (or other person with respect to
whom the individual is defined as a qualifying child):whom the individual is defined as a qualifying child):
 Is not required to, and does not, file an income taxIs not required to, and does not, file an income tax
return, orreturn, or
 Files an income tax return solely to obtain a refund ofFiles an income tax return solely to obtain a refund of
withheld income taxeswithheld income taxes

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Qualifying Relative
Example: Jack is single and supports asExample: Jack is single and supports as
members of the household his girlfriend Mary,members of the household his girlfriend Mary,
and Mary’s 3-year-old daughter. Mary and herand Mary’s 3-year-old daughter. Mary and her
daughter lived all year with Jack. Mary has nodaughter lived all year with Jack. Mary has no
gross income and she is not required to file angross income and she is not required to file an
income tax return. Because Mary doesincome tax return. Because Mary does notnot havehave
a filing requirement anda filing requirement and did notdid not file an incomefile an income
tax return, Mary’s daughter is not treated as atax return, Mary’s daughter is not treated as a
qualifying child of Maryqualifying child of Mary or any other taxpayer,or any other taxpayer,
and Jackand Jack may claim the child as hismay claim the child as his
qualifying relative, provided all otherqualifying relative, provided all other
requirements are met.requirements are met.

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QUALIFYING RELATIVE
Member of Household or Relationship Test (Test 2)
A person must either live with you all year as a member of
your household, or be related to you in one of the ways
listed below who do not have to live with you.
a. If the person is your child, stepchild, eligible foster child,
brother, sister, half brother, half sister, stepbrother, stepsister,
father, mother, grandparent, stepfather, stepmother, son-in-
law, daughter-in-law, father-in-law, mother-in-law, brother-in-
law, sister-in-law or a descendent of these they do not have to
live with you as a member of your household.
b. An eligible foster child is an individual who is placed with you
by an authorized placement agency or by judgment, decree, or
other order of any court of competent jurisdiction.
c. A cousin meets this test only if he or she lives with you all year
as a member of your household.
d. A person does not meet this test if at any time during the year
the relationship between you and that person violates local
law.

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QUALIFYING RELATIVE
Gross Income Test (Test 3)
To meet this test, a person’s gross income for
the year must be less than $3,500. Gross
income is all income in the form of money,
property, and services that is not exempt
from tax.

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QUALIFYING RELATIVE
1. You must provide more than half of the total
support for the person to meet this test except
for multiple support and children of divorced
or separated parents.
2. Total support includes amounts spent for food,
lodging, clothing, education, medical and
dental care, medical insurance premiums,
recreation, transportation, and similar
necessities.

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QUALIFYING RELATIVE
3. State benefit payments like welfare, food stamps, and
housing are considered support provided by the state,
not by the parent, regardless of how the parent actually
spends the money.
a. In the case of multiple support, no one person provides
more than half of the individual’s support, but two or
more people together do. You can agree that any one of
you who individually provided more than 10% of the
individuals support can claim the exemption. The other
contributors must sign a statement agreeing not to
claim the exemption for that year.
b. In most cases of divorced and separated parents a child
will be the qualifying child of one of the parents.
However, if the child does not meet the requirements to
be a qualifying child of either parent, the child may be a
qualifying relative of one of the parents. In that case
follow the rules for divorce and separated parents.

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SUPPORT TEST - PROBLEM 4SUPPORT TEST - PROBLEM 4
Your mother received $2,400 in social
security benefits. She also received
$300 in interest which she put into
her savings account. She paid $2,000
toward the rent and $400 for
recreation. The total rent was $2,820
and you paid all of her food expenses
($1,395). Do you pass the Support
Test?
Yes or No?

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Your mother received $2,400 in social security
benefits. She also received $300 in interest
which she put into her savings account. She paid
$2,000 toward the rent and $400 for recreation.
The total rent was $2,820 and you paid all of
her food expenses ($1,395). Do you pass the
Support Test?
No
Your mother’s total expenses were $4,615 (rent,
food & recreation). She paid $2,400 and you
only paid $2,215 ($820 and $1,395) which is
less than half.

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Darlene spent $2,400 for food, clothing, and
shelter for her 26-year-old son Bill. She
received $3,000 from welfare for her son.
Can she claim a dependency exemption for
her son?
Yes or No?

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Darlene spent $2,400 for food, clothing, and
shelter for her 26-year-old son Bill. She
received $3,000 from welfare for her son.
Can she claim a dependency exemption for
her son?
No.
The $3,000 from welfare is more than half of
Bill’s total support of $5,400. Darlene cannot
claim a dependency exemption for her son
because she did not provide more than half
of Bill’s support.

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Tax-exempt income, savings, and borrowed
amounts used to support the person do figure
Into total support. Support may also include
furniture, appliances, and cars if they are bought
for the person’s own use.
Calculate lodging using the fair rental value if
there was no rent actually collected. The fair
rental value is the amount you could reasonably
expect a stranger to pay for the same kind of
lodging.
QUALIFYING RELATIVE

45
QUALIFYING RELATIVE
Fair Rental Value CalculationFair Rental Value Calculation
Your parents live rent free in a house you own. It has a
fair rental value of $5,400 a year furnished, which
includes a fair rental value of $3,600 for the house
and $1,800 for the furniture. This does not include
heat and utilities. The house is completely furnished
with furniture belonging to your parents. You pay
$600 for their utility bills. Utilities are not usually
included in rent for houses in the area where your
parents live. Therefore, you consider the total fair
rental value of the lodging to be $6,000 ($3,600 fair
rental value of the unfurnished house, $1,800
allowance for furnishings provided by your parents,
and $600 cost of utilities) of which you are
considered to provide $4,200 ($3,600 + $600).

46
QUALIFYING RELATIVE
Total support does NOT include income taxes paid
by the person for his/her own income, social
security and Medicare taxes paid by the person
from his/her own income, life insurance
premiums, funeral expenses, scholarships to
your child if a full-time student, and Survivors
and Dependents Educational Assistance
payments used for support of the child who
receives them.

47
QUALIFYING RELATIVE
Determining Total SupportDetermining Total Support
Don and Donette Davids want to claim Donette’s mother, Shirley
Doubting, as their dependent. Shirley lived with the Davids for
the entire year. She received social security payments of
$4,200 and earned $800 in interest on her savings account,
which had a balance of $20,000 at the beginning of 2008. She
put $300 of her social security into her savings account and
also kept the $800 interest in her account. The Davids’
monthly household expenses included:
Fair rental value of home $720
Food 400
Utilities and phone 180
They also paid the following for Shirley:
Beauty salon $1,400 Clothing $550
Doctor bills 300 Cosmetics 180
Travel 250 Entertainment 500
Gifts 450
Did you provide more than half the support?
Yes or No?

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There are two exceptions to the support test:
 Multiple support
 Children of divorced or separated parents
In the case of MULTIPLE SUPPORT, no one person
provides more than half of the individual’s support, but
two or more people together do. You can agree that
any one of you who individually provides more than
10% of the individual’s support (but only ONE) can
claim the exemption if the other tests are met. The
other contributors must sign a statement agreeing not
to claim the exemption for that year. The person who
claims the exemption must keep these signed
statements for their records. A multiple support
declaration identifying each of the others who agreed
not to claim the exemption must be attached to the
return of the person claiming the exemption. Form
2120, Multiple Support Declaration, can be used for this
purpose.
QUALIFYING RELATIVE

50
Donald and Dennis Farrow each provide
30 percent of the support of their
father, Milo. Milo provides the rest of
the support. Donald can claim the
exemption for his father if Dennis signs
a statement agreeing not to claim an
exemption for Milo.
True or False?

51
Donald and Dennis Farrow each provide 30
percent of the support of their father, Milo.
Milo provides the rest of the support. Donald
can claim the exemption for his father if
Dennis signs a statement agreeing not to
claim an exemption for Milo.
True.
Donald keeps the statement with his records
and submits Form 2120 with his return.

52
QUALIFYING RELATIVE
Support Test for Children of Divorced or SeparatedSupport Test for Children of Divorced or Separated
ParentsParents
A child will be treated as being the qualifying relative
of his or her non-custodial parent if all of the
following apply:
The parents:
1. Are divorced or legally separated under a decree of
divorce or separate maintenance.
2. Are separated under a written separation agreement.
3. Lived apart at all times during the last 6 months of the
year.
 The child received over half of his or her support for the year
from the parents.
 The child is in the custody of one or both parents for more
than half of the year.
 A decree of divorce or separate maintenance or written
separation agreement that applies to 2008 provides that the
noncustodial parent can claim the child as a dependent (and,
in the case of a pre-1985 agreement, the noncustodial parent
provides at least $600 for the support of the child during the
year) or the custodial parent signs a written declaration (such
as Form 8332) that he or she will not claim the child as a
dependent for the year.

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PHASEOUT OF EXEMPTIONSPHASEOUT OF EXEMPTIONS
The amount you can claim as a deduction for
exemptions is PHASED OUT once your
adjusted gross income (AGI) goes above a
certain level for your filing status. You must
reduce the dollar amount of your
exemptions by 2% for each $2,500, or part
of $2,500 ($1,250 for MFS) that your AGI
exceeds the level for your filing status.
However, you can lose no more than 1/3 of
the dollar amount of your exemptions. In
other words, each exemption cannot be
reduced to less than $2,333.

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EXEMPTIONS AND DEPENDENTSEXEMPTIONS AND DEPENDENTS
KEY IDEAS
Rules for claiming an exemption for a dependent
1. You cannot claim any dependents if you, or your
spouse if filing jointly, could be claimed as a
dependent by another taxpayer.
2. You cannot claim a married person who files a
joint return as a dependent unless that joint
return is only a claim for refund and there
would be no tax liability for either spouse on
separate returns.
3. You cannot claim a person as a dependent
unless that person is a U.S. citizen, U.S. resident,
U.S. national, or a resident of Canada or Mexico,
for some part of the year.
4. You cannot claim a person as a dependent
unless that person is your qualifying child or
qualifying relative.

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KEY IDEAS
Qualifying Child
1. The child must be your son, daughter, stepchild, eligible foster
child, brother, sister, half brother, half sister, stepbrother,
stepsister, or a descendant of any of them.
2. The child must be
1. under age 19 at the end of the year
2. under age 24 at the end of the year and a full-time student, or
3. any age if permanently and totally disabled.
3. The child must have lived with you for more than half of the
year.
4. The child must not have provided more than half of his or her
own support for the year.
5. If the child meets the rules to be a qualifying child of more than
one person, you must be the person entitled to claim the child as a
qualifying child.

56
KEY IDEAS
Qualifying Relative
1. The person cannot be your qualifying child or the
qualifying child of any other taxpayer.
2. The person either (a) must be related to you in
one of the ways listed under relatives who do not
have to live with you, or (b) must live with you all
year as a member of your household.
3. The person’s gross income for the year must be
less than $3,500.
4. You must provide more than half of the person’s
total support for the year.

57
CLASSWORK 1: Using the Rules for Dependency,
(1) Tracey spent $3,300 for food, shelter, and clothing for her four-year-old
daughter. She received $2,900 from welfare for her daughter. Is the
support test met for a qualifying child?
(2) Phil’s son, Tony, earned $3,550 last year. Tony is 21 years old and
started college in September 2008. Is the age test for a qualifying
child met?
(3) Joanne’s daughter, Adrienne, earned $3,550 last year. Adrienne is 20
years old and not in school. Can Joanne claim Adrienne as a dependant?
(4) Curly provided all of the support of his father, Larry, who lived with him all
year. Larry’s only income is $3,600 of interest and social security of
$1,200. Can Curly claim Larry as a dependent?
(5) Can Myra claim a person with a gross income of $3,500 as a qualifying
relative?
(6) Fred lives with his girlfriend Sue and her six-year-old child Amy. Fred
provides over half of the support for Amy and both Sue and Amy lived
all year with Fred. Sue has no income and she has not signed a Form
8332 allowing the noncustodial parent to claim Amy. Can Amy be Fred’s
qualifying child? If not, can Fred claim her as a qualifying relative?

58
CLASSWORK 1: Using the Rules for Dependency,
(1) Tracey spent $3,300 for food, shelter, and clothing for her four-year-old
daughter. She received $2,900 from welfare for her daughter. Is the
support test met for a qualifying child? YES
(2) Phil’s son, Tony, earned $3,550 last year. Tony is 21 years old and
started college in September 2008. Is the age test for a qualifying
child met? NO
(3) Joanne’s daughter, Adrienne, earned $3,550 last year. Adrienne is 20
years old and not in school. Can Joanne claim Adrienne as a dependant?
NO
(4) Curly provided all of the support of his father, Larry, who lived with him all
year. Larry’s only income is $3,600 of interest and social security of
$1,200. Can Curly claim Larry as a dependent? NO
(5) Can Myra claim a person with a gross income of $3,500 as a qualifying
relative? NO
(6) Fred lives with his girlfriend Sue and her six-year-old child Amy. Fred
provides over half of the support for Amy and both Sue and Amy lived all
year with Fred. Sue has no income and she has not signed a Form 8332
allowing the noncustodial parent to claim Amy. Can Amy be Fred’s
qualifying child? NO If not, can Fred claim her as a qualifying relative?
YES

59
CLASSWORK 2: True or False.
(1) The custodial parent can sign an agreement allowing the noncustodial
parent to claim an exemption for their child.
(2) The support test for qualifying child states that the child cannot have
provided over half of his/her own support.
(3) Every person claimed as a dependent must have a social security number
or other valid taxpayer identification number.
(4) You can never take an exemption for your dependent if he/she files a joint
return.
(5) The custodial parent can sign a statement releasing the child’s exemption
to the noncustodial parent. The written declaration can only release the
exemption for one year.
(6) A technical school does not meet the school definition for the age test for
qualifying child.
(7) If your filing status is MFS, you can always claim an exemption for
yourself and one for your wife.
(8) Temporary absences due to special circumstances do not prohibit
someone from being a member of your household.

60
(9) If your spouse died during the year, you cannot claim their exemption.
(10) The custodial parent is the parent with whom the child lived the greater
part of the year.
(11) An eligible foster child meets the relationship test for qualifying child.
(12) If two people together contribute more than half an individual’s support,
they both can claim the exemption.
(13) You can use entertainment costs in calculating total support for a person.
(14) A person must live with you over half the year as a member of your
household or be related to you in one of the ways listed in “relatives who
do not have to live with You all year”, to meet the member of household or
relationship test for qualifying relative.
(15) To meet the citizenship test, a person must be a U.S. citizen for the
entire year.

61
(16) A household member who dies during the year meets the
member of household test for qualify relative.
(17) Gross income includes money, property, tax-exempt income,
and services.
(18) A person related to your spouse is not considered to meet the
relationship test for you once you are divorced.
(19) If your child is 24 years old and a full-time student with a
gross income of $3,500, you cannot claim an exemption for that
child.
(20) To qualify for the gross income test for a qualifying relative,
your 27-year-old child must earn less than $3,500.

62
(1) The custodial parent can sign an agreement allowing the noncustodial
parent to claim an exemption for their child. T
(2) The support test for qualifying child states that the child cannot have
provided over half of his/her own support. T
(3) Every person claimed as a dependent must have a social security number
or other valid taxpayer identification number. T
(4) You can never take an exemption for your dependent if he/she files a joint
return. F
(5) The custodial parent can sign a statement releasing the child’s exemption
to the noncustodial parent. The written declaration can only release the
exemption for one year. F
(6) A technical school does not meet the school definition for the age test for
qualifying child. F
(7) If your filing status is MFS, you can always claim an exemption for
yourself and one for your wife. F
(8) Temporary absences due to special circumstances do not prohibit
someone from being a member of your household. T

63
(9) If your spouse died during the year, you cannot claim their exemption. F
(10) The custodial parent is the parent with whom the child lived the greater
part of the year. T
(11) An eligible foster child meets the relationship test for qualifying child. T
(12) If two people together contribute more than half an individual’s support,
they both can claim the exemption. F
(13) You can use entertainment costs in calculating total support for a person.
T
(14) A person must live with you over half the year as a member of your
household or be related to you in one of the ways listed in “relatives who
do not have to live with You all year”, to meet the member of household or
relationship test for qualifying relative. F
(15) To meet the citizenship test, a person must be a U.S. citizen for the
entire year. F

64
(16) A household member who dies during the year meets the
member of household test for qualify relative. T
(17) Gross income includes money, property, tax-exempt income,
and services. F
(18) A person related to your spouse is not considered to meet the
relationship test for you once you are divorced. F
(19) If your child is 24 years old and a full-time student with a
gross income of $3,500, you cannot claim an exemption for that
child. T
(20) To qualify for the gross income test for a qualifying relative,
your 27-year-old child must earn less than $3,500. T

65
CLASSWORK 3: Complete a dependency support form and determine if the taxpayers can
claim the exemption.
Frank (SSN 110-24-9330) and Gloria Stephens (SSN 234-56-7890) live at 397 Westend Rd.,
Nashville, TN 37203. Gloria’s father, Mr. James (SSN 012-45-1213) lived with them for all of
2008. He is a widower and a U.S. citizen.
Mr. James received $4,000 in social security and earned $920 in interest in his savings
account, which had a balance of $23,000 at the beginning of 2008. He saved $800 of these
social security payments and also saved his interest earnings. The remaining money was
spent for his support.
Frank and Gloria also have a 3-year-old daughter living with them. They figured the fair
rental value of their home was $700 per month. Other monthly expenses included $650
for food and $210 for utilities. Mr. James’ other expenses for the year were as follows:
Clothing $ 405
Medical/dental expenses 1,150
Travel 500
Gifts 400
Dry cleaning 75
Entertainment 500
Cosmetics 180
Hair cuts 130
Fill in a dependency support chart and determine whether Mr. James meets the
dependency tests.

67
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