Common situation: You help a low-income parent, in-law or other elderly relative with his or her living expenses. Under the tax law, you can’t claim a dependency exemption ($3,650 for 2009) for that person unless you provide more than half of his or her annual support.
Strategy: Chip in a few more bucks in the second half of the year. If it pushes you over the half-support mark for 2009, you might qualify for an extra exemption.
The tax payoff may be due to a little-noticed tax break involving Social Security benefits.
Here’s how: In addition to the half-support test, you generally can’t claim a dependency exemption for a relative if his or her gross income for the year exceeds the personal exemption amount ($3,650 for 2009). This “gross income test” doesn’t apply to a child who is under age 19 or a full-time student under age 24.
But note that gross income doesn’t include amounts if income is being deferred—such as certificates of deposit (CDs) maturing next year, or tax-free income from municipal bonds or muni bond funds.
Even better: While Social Security benefits used for support count toward the half-support test, they do not count as gross income for purposes of the $3,650 ceiling.
Example: You give 75-year-old Aunt Jill $1,000 a month ($12,000 for the year) to help her pay her bills. She is single and lives on $2,250 in taxable earnings and $10,000 of Social Security benefits.
On these facts, you don’t qualify for a dependency exemption. However, if you give Jill just an extra $251 this year, you will provide more than half of her annual support—$12,251 to $12,250—while she still doesn’t surpass the gross income limit. Result: You’re entitled to a $3,650 exemption for Jill.
Tip: Personal exemptions are reduced for certain high-income tax taxpayers (e.g., joint filers with an AGI above $250,200 for 2009).
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