justicestatue

Welcome to the Stepnowski Law Offices

Disabilities Library

Introduction to the Exemption for Dependents  for parents of children with disabilities.

sponsored by the Stepnowski Law Offices

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 2014, the amount was $3,950, and in 2012, the amount was be $3,900 per person.  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 allows the taxpayer to pay under the lower Head-of-Household" rate. 26 USC 1(b), 2(b).  The subject of this page is the rules to qualify and how they apply to a disabled child drawing governmental benefits. 

  • 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.


Section 152 of the Internal Revenue Code states:
“A qualifying child means an individual who: 
  1.  Bears a qualifying relationship to the taxpayer (e.g., a child of the taxpayer);
  2.  has the same principal place of abode as the taxpayer for more than one-half of the taxable year;
  3.  meets the age requirement of section 152(c)(3);
  4.  has not provided over one-half of his or her own support for the taxable year; and
  5.  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 point 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: 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 will depend on all the individual facts.  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 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 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, a person's gross income for the year must be less than $3,950.

  • 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, 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 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.

Worksheet 2.     Worksheet for Determining Support

http://www.irs.gov/publications/p501/ar02.html#en_US_2012_publink1000220868

This is the worksheet provided by the IRS to determine whether your dependent qualifies as an exemption.

Funds Belonging to the Person You Supported      
1. Enter the total funds belonging to the person you supported, including income received (taxable and nontaxable) and amounts borrowed during the year, plus the amount in savings and other accounts at the beginning of the year. Do not include funds provided by the state; include those amounts on line 23 instead 1.    
2. Enter the amount on line 1 that was used for the person's support 2.    
3. Enter the amount on line 1 that was used for other purposes 3.    
4. Enter the total amount in the person's savings and other accounts at the end of the year 4.    
5. Add lines 2 through 4. (This amount should equal line 1.) 5.    
Expenses for Entire Household (where the person you supported lived)      
6. Lodging (complete line 6a or 6b):      
  a. Enter the total rent paid 6a.    
  b. Enter the fair rental value of the home. If the person you supported owned the home,  
also include this amount in line 21 		6b.    
7. Enter the total food expenses 7.    
8. Enter the total amount of utilities (heat, light, water, etc. not included in line 6a or 6b) 8.    
9. Enter the total amount of repairs (not included in line 6a or 6b) 9.    
10. Enter the total of other expenses. Do not include expenses of maintaining the home, such as mortgage interest, real estate taxes, and insurance 10.    
11. Add lines 6a through 10. These are the total household expenses 11.    
12. Enter total number of persons who lived in the household 12.    
Expenses for the Person You Supported      
13. Divide line 11 by line 12. This is the person's share of the household expenses 13.    
14. Enter the person's total clothing expenses 14.    
15. Enter the person's total education expenses 15.    
16. Enter the person's total medical and dental expenses not paid for or reimbursed by insurance 16.    
17. Enter the person's total travel and recreation expenses 17.    
18. Enter the total of the person's other expenses 18.    
19. Add lines 13 through 18. This is the total cost of the person's support for the year 19.    
Did the Person Provide More Than Half of His or Her Own Support?      
20. Multiply line 19 by 50% (.50) 20.    
21. Enter the amount from line 2, plus the amount from line 6b if the person you supported owned  
the home. This is the amount the person provided for his or her own support 		21.    
22. Is line 21 more than line 20? 
checkbox
No. You meet the support test for this person to be your qualifying child. If this person also meets the other tests to be a qualifying child, stop here; do not complete lines 23–26. Otherwise, go to line 23 and fill out the rest of the worksheet to determine if this person is your qualifying relative. 
checkbox
 Yes. You do not meet the support test for this person to be either your qualifying child or your qualifying relative. Stop here.		  
  Did You Provide More Than Half?      
23. Enter the amount others provided for the person's support. Include amounts provided by state, local, and other welfare societies or agencies. Do not include any amounts included on line 1 23.    
24. Add lines 21 and 23 24.    
25. Subtract line 24 from line 19. This is the amount you provided for the person's support 25.    
26. Is line 25 more than line 20? 
checkbox
Yes. You meet the support test for this person to be your qualifying relative.
checkbox
 No. You do not meet the support test for this person to be your qualifying relative. You cannot claim an exemption for this person unless you can do so under a multiple support agreement, the support test for children of divorced or separated parents, or the special rule for kidnapped children.

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.
Home page

Stepnowskilaw.com home
Stepnowski Law Library

Contact Us: 

1515 N. Harlem Ave., suite 205-2 
Oak Park, Illinois 60302 
telephone: (708) 848-3663, 848-3662 
fax: (708)  848-0219

 
email Frank Stepnowski 

Member, Chicago Bar Association Advocates Member, Illinois Bar