With precious little fanfare, the Working Families Tax Relief Act of 2004 revamped the rules for dependency exemptions. It created a uniform definition of "child" and relaxed the requirements for certain taxpayers. But the old rules still apply in some situations, resulting in even greater confusion for taxpayers. Here's a quick primer on the old rules, plus how you can take advantage of the new rules.
Old dependency exemption rules
You're allowed to claim one personal exemption for each dependent you claim on your tax return. The personal exemption amount is adjusted for inflation each year. For 2005, the amount is $3,200 (up from $3,100 for 2004). So, if you claim four dependents on your 2005 return, you can reduce your adjusted gross income (AGI) by $12,800.
To qualify for a dependency exemption, five tests must be passed:
1. Member of household or relationship test. The person claimed as a dependent ...(register to read more)