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Join forces for a dependency exemption

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in Small Business Tax

Perhaps you and one or more of your siblings support an elderly parent. But the problem is that none of you give enough on your own to qualify for a dependency exemption deduction.

Strategy: Set up a multiple support agreement. With this arrangement, you pool all of the money used for the parent’s support. As long as certain other requirements are met, one of you can claim the exemption deduction for your parent each year.

Typically, the participants in a multiple support agreement will trade off the exemption deduction year-to-year.

Here’s the whole story: Generally, you can claim a dependency exemption deduction for a relative if (1) you provide more than half of the relative’s support for the year and (2) the relative’s gross income must be less than the personal exemption deduction amount for the applicable year. The personal exemption amount for 2016 is $4,050 (up from $4,000 in 2015).

To qualify for a multiple support agreement exemption, you must satisfy these requirements:

  • The relative must receive more than half of his or her total support from the family.
  • Each of the contributors must be able to claim the relative as a dependent except for the half-support test.
  • No one individual can contribute more than half of the relative’s support.
  • The person claiming the exemption must provide more than 10% of the relative’s support.
  • Anyone else contributing more than 10% of the relative’s support must agree not to claim the exemption.

All you have to do is fill out Form 2120, Multiple Support Declaration.

Frequently, the biggest obstacle is that the relative’s gross income must be less than the personal exemption amount. In a borderline case, have the relative shift some of the investments into tax-free municipal bonds or growth stock.

The tax benefits of personal exemptions phase out for upper-income taxpayers. For 2016, the phase out begins at $259,400 of AGI for single filers and $311,300 of AGI for joint filers.

Tip: If the phaseout rule would wipe out your exemption deduction, try to make arrangements for another family member to collect the tax savings from a multiple support arrangement.

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