Wednesday, February 7, 2001
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Wednesday, February 7, 2001 |
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Exemptions can help minimize tax bills
Some people will go to great lengths and rightly so to make certain that they take every deduction due them. Yet many of these same people overlook the value of maximizing dependency exemptions. The Georgia Society of CPAs reports that, for 2000, each dependency exemption lowers the amount of income subject to tax by $2,800. Here's what you need to know to determine how you can make the most of these exemptions. FIVE-PART DEPENDENCY TEST A five-part test is used to determine whether an individual may be claimed as your dependent. (1) Dependents must receive over half of their support from you. (2) If the dependent is not a relative, he or she must have lived with you and been a member of your household for the entire year. (3) A dependent must be a U.S. citizen, or a resident of the U.S., Canada, or Mexico. (4) He or she may not file a joint return with anyone, except in certain instances where a refund is being claimed. (5) A prospective dependent's gross income must be less than $2,800 for 2000. (The gross income requirement does not apply to a child under the age of 19 or to a full-time student under age 24.) Typically, deciding whether a member of your household is a dependent is relatively simple. In the most common cases, the person is a minor child living with and supported by one or both parents. However, in some instances, where an extended family lives under one roof, there may be questions as to whether certain individuals qualify for dependency exemptions. Additionally, you may be able to claim a person you support as a dependent, even if they are not living with you. To help you address these issues, here are answers to some frequently asked questions regarding dependency exemptions. Q. My two sisters and I support our mother who lives with me. Together, in 2000, we paid more than half of her total support but, because we split the cost three ways, individually, none of us pays more than 50 percent of her care. Can we qualify for the dependency exemption? A. Yes. In such situations, as long as you each paid over 10% of total support for the dependent and together overall provide 50% of her total support, you may agree among yourselves to have one of you take the exemption. You can also take turns claiming the exemption. Form 2120 must be completed. Q. In determining whether I furnished over half the support for a dependent, what exactly counts as support? A. Among the items considered as support of a dependent are: food, shelter, clothing, medical and dental care, health insurance premiums, education, transportation, recreation, and similar necessities. To compute the value of the shelter you provide, use its "fair rental value" that is, the amount you could reasonably expect to receive from a stranger for the same lodging. You may also factor in a reasonable allowance for the use of furnishings, telephone, electricity, etc. Q. Are there limitations on who can claim dependency exemptions? A. Yes, the dependency exemption is subject to adjusted gross income (AGI)thresholds. For the 2000 tax year, it begins to be phased out for single filers with AGIs of $128,950, joint filers with AGIs of $193,400, married filing separately with AGIs of $96,700 and heads of household with AGIs of $161,150. Q. Our income has reached the point where we no longer get the full benefit of dependency exemptions. Can our son who is away at college claim a personal exemption on his own return? A. There is nothing optional about the dependent exemption rule. If you are eligible to claim an exemption for your child who is away at college, the child cannot claim his or her own exemption. This is true even if you are going to lose some or all of your personal exemptions because your income is too high. Q. The total cost of my parents' support is $28,000, of which they pay $20,000 and I contribute the remaining $8,000, which is less than half. Is there another way of structuring my payments that would allow me to claim my parents as dependents? A. Instead of contributing to the combined support of your parents, offer all of your support to just one parent and have them file married filing separately. Your $8,000 would be more than half of one parent's total support ($14,000). Be sure you can back up your plan with checks made payable to just the one parent. The GSCPA is the premier professional organization for CPAs in the state of Georgia. With over 10,000 members throughout the state, the purpose of the GSCPA is to promote the study of accountancy and applicable laws, provide continuing professional education, maintain high ethical and work standards, and provide information about accounting issues to the membership and the public. For more information, access our web site at www.gscpa.org. |