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IRS Dependency Tests

The IRS requirements for a person to be counted as a dependent on a taxpayer's return and the notion of a dependent for financial aid purposes are not the same. The term as used by the IRS is defined in Title 26, Subtitle A, Chapter 1, Subchapter B, Part V, Section 152 of the Internal Revenue Code. (See also IRS Publication 501.) The term as used by the US Department of Education is defined in section 480 of the Higher Education Act of 1965 (20 USC 1087vv).

Note that the US Department of Education's treatment of support generally follows that of the IRS, with a few exceptions:

  • If a parent is receiving support from government assistance programs for dependent children, those benefits are considered as part of the parent's support to the child. Examples include Temporary Assistance to Needy Families (TANF), as well as Social Security and AFDC payments. Likewise for support received from someone other than the student's parents or spouse.
  • The parent's children do not need to live with him or her to be counted as members of his/her household, so long as they received or will receive more than half of their support from him/her.
  • Whether a divorced or separated parent claims a child as a dependent on the tax return is irrelevant when deciding whose household the child belongs to for financial aid purposes.
  • The IRS does not require the parent to provide more than half support for a qualifying child, only that the child not have provided more than half his/her own support. (For qualifying relatives, the 50% support test still applies.)

Another difference is the IRS does not count scholarships received by a son, daughter, stepson or stepdaughter of the taxpayer in determining whether the support test is satisfied, so long as the child is a full-time student.

Independent Student

The term Independent Student is defined in section 480(d) of the Higher Education Act:

INDEPENDENT STUDENT. - The term 'independentí, when used with respect to a student, means any individual who -

  1. is 24 years of age or older by December 31 of the award year;
  2. is an orphan or ward of the court or was a ward of the court until the individual reached the age of 18;
  3. is a veteran of the Armed Forces of the United States
  4. is a graduate or professional student;
  5. is a married individual;
  6. has legal dependents other than a spouse; or
  7. is a student for whom a financial aid administrator makes a documented determination of independence by reason of other unusual circumstances.

Note how item 6 defines an independent student in terms of the IRS definition.

Dependent Student

The term Dependent Student is defined in section 480(k) of the Higher Education Act:

DEPENDENTS. -

  1. Except as otherwise provided, the term 'dependent of the parentí means the student, dependent children of the studentís parents, including those children who are deemed to be dependent students when applying for aid under this title, and other persons who live with and receive more than one-half of their support from the parent and will continue to receive more than half of their support from the parent during the award year.
  2. Except as otherwise provided, the term 'dependent of the studentí means the studentís dependent children and other persons (except the studentís spouse) who live with and receive more than one-half of their support from the student and will continue to receive more than half of their support from the student during the award year.

Note how items 1 and 2 define a dependent student in terms of the IRS definition.

IRS Definition of Dependent

The IRS definition of a dependent requires that all five of the following dependency tests be met:

  1. Member of Household or Relationship Test. At least one of the following must be true:
    1. The dependent lived with the taxpayer for the entire year as a member of the taxpayer's household, except for temporary absences. Temporary absences include attending school, taking vacations, business trips, military service, and hospital stays. (If the person is placed in a nursing home for an indefinite period of time to receive constant medical care, the absence is considered temporary.) The relationship between the taxpayer and the dependent must not violate local laws (e.g., zoning restrictions on the number of unrelated persons living together).
    2. The dependent is related to the taxpayer in one of the following ways: child, parent, brother/sister, stepparent, stepchild, stepbrother/stepsister, half brother/half sister, grandparent, grandchild, son-in-law/daughter-in-law, mother-in-law/father-in-law, brother-in-law/sister-in-law. Also, if related by blood, relatives can include uncle/aunt and niece/nephew. Cousins do NOT meet the relationship test. Relationships established by marriage are not ended by death or divorce. Relatives do not have to be members of the taxpayer's household for the entire year. (There are special rules for children born during the year, adopted children, and foster children.)

  2. Citizen or Resident Test. The dependent must be, for some part of the year, a US citizen or resident, or a resident of Canada or Mexico. Foreign students who stay with you as part of an international education exchange program generally do not qualify as dependents.

  3. Joint Return Test. The dependent must be unmarried, married but not filing a joint return, or married filing a joint return only to claim a refund of withheld tax (neither the dependent nor spouse may claim personal exemptions on the joint return).

  4. Gross Income Test. The gross taxable income of the dependent (all taxable income including money, property and services, unemployment compensation and certain scholarships, but not welfare benefits and not nontaxable Social Security benefits) may not exceed the exemption amount. In 2004 the exemption amount was $3,100. This test does not apply if the dependent is a child of the taxpayer and either under age 19 at the end of the year, or a full-time student under age 24 at the end of the year.

  5. Support Test. The taxpayer must have provided more than half of the dependent's total support for the entire year. (Starting in 2005, the 50% support test only applies to qualifying relatives. For qualifying children, it is sufficient that the child not have provided more than half his/her own support.) Support includes food, clothing, shelter, education, medical and dental care, recreation, and transportation; as well as welfare, food stamps, and housing provided by the state. You must compare the dollar value of the support provided by the taxpayer with the total support the dependent received from all sources. (Note: There are special rules for dependents who receive support from multiple sources and for children of divorced or separated parents.) The support test considers all income, not just taxable income.

    See the Support Test Form for a form you can use to determine whether you provided more than half the dependent's total support for the entire year.

In addition, a taxpayer cannot claim a person as a dependent if the person can be claimed as a dependent on another taxpayer's return. A dependent cannot claim his or her personal exemption if another taxpayer is entitled to do so.

Special circumstances:

  • Kidnapped children. If a child has been presumed by law enforcement authorities to have been kidnapped by someone who is not a member of your family or the child's family, and the child qualified as your dependent for part of the year before the kidnapping, you may claim the child as a dependent.
  • Newborn children. If the child is born alive (even if the child lived only for a moment) and the rest of the dependency tests are met, the child may be claimed as a dependent. Stillborn children, however, may not be claimed as a dependent. If the child would have been a member of your household during the year except for a required hospital stay following birth, the child counts as a dependent.
  • Adopted children. A legally adopted child is considered your child. This is the case even if the adoption is not yet final, so long as the child was placed with you for legal adoption by an authorized placement agency and the child was a member of your household. If the child was not placed with you by an authorized placement agency, the adopted child will only count as a dependent if he or she was a member of your household for the entire tax year.
  • Foster children. A foster child must live with you as a member of your household for the entire year to qualify as a dependent. A foster child is one who is in your care that you care for as your own child. It does not matter how the child became a member of the household.
  • Foster parent. A foster parent does not count as a dependent.
  • Cousins. A cousin can only count as a dependent if he or she lives with your as a member of your household for the entire year. A cousin is defined as a descendent of a brother or sister of your father or mother.
  • Death of dependent. If the dependent died during the year and otherwise met the dependency tests, you may claim the dependent.
  • Housekeepers, maids, servants, and other household employees may not be claimed as dependents.
  • Joint returns. If you file a joint return, the dependent can be related to either spouse. If you file separate returns, the dependent must be either be related to you by the definitions give above or a member of your household who lived with you for the entire tax year.

Support Test Notes:

  • Child wages. Any support that is paid for by the child using the child's own wages cannot be included in your contribution to the child's support, even if you paid the wages.
  • Funds spent for support. Only funds actually spent for support of the dependent by the parent count as support.
  • Year of support. The year the support is provided is the year in which you paid for the support, even if you paid for it using borrowed money. If you are a fiscal year filer, the year is the calendar year in which your fiscal year begins.
  • Payee on checks. Funds received by check are proportionately divided among all payees listed on the check. For example, if a Social Security benefit check payable to husband and wife, half is considered to be for the support of each spouse.
  • Lump sum payments amortized. If you make a lump sum payment to a nursing home to care for your relative for the rest of his or her life, and the payment is based on your relative's life expectancy, the amount of support you provide is the lump sum payment divided by the relative's life expectancy.
  • Homeowners with mortgages. Do not report the mortgage payments. Instead, report the fair rental value of the lodging. This is the amount an unrelated stranger would be willing to pay in rent for the lodging. To identify the fair rental value of the property, look in the local real estate listings to see what rent is charged for houses with a similar number of bedrooms and baths in the same neighborhood. A good reasonableness test is that the gross annual rent will be around 10% of the fair market value for the property. Fair rental value is a measure of the value of the support you are providing to the dependent.
  • Living rent free. If you live rent free in the dependent's home, you must reduce the amount you provide for support by the fair rental value of the lodging he or she provides you.
  • Health insurance. Health insurance premiums you pay are included in the support you provide. Health insurance benefits received are not part of support.
  • Tuition payments and allowances received under the GI Bill are included in total support.
  • Federal, state, and local income taxes are not included in total support when paid by persons from their own income. Similarly for Social Security and Medicare taxes.
  • Life insurance premiums are not included in support.
  • Funeral expenses are not included in support.
  • Scholarships received by your child are not included in support if your child is a full-time student.
  • Multiple Support Agreements. If nobody provides more than half the support for a person, but together two or more people provide more than half the support for a person, you may form an agreement as to which one of you may count the person as your dependent. Only one of you may count the person as your dependent, and you must provide at least 10% of the support for that person. The others must sign a statement agreeing to not count that person as a dependent for that year. You must submit IRS Form 2120 Multiple Support Declaration.
  • Divorced or separated parents. If the child's parents are divorced or separated, one or both parents provide more than half the child's total support, and one or both parents have custody of the child for more than half the calendar year, special rules apply. The parent who has custody of the child for the greater part of the year is generally treated as the parent who provides more than half of the child's support. The main exception is when there is a written agreement as to which parent may claim the exemption. Form 8332 may be used to make the written declaration releasing the exemption to the other parent.
  • Child support. Child support payments received from the noncustodial parent are considered to be used for support of the child, even if they are actually spent on things other than support. Child support owed but paid in a later year does not count as support for either year. Support provided by a third party for a divorced or separated parent is not included as support provided by that parent, unless that parent remarried and the support is provided by the parent's spouse.

Note that a student (and/or spouse) who provides more than half the support for a dependent child but who does not provide more than half the student's own support is considered dependent for student aid purposes.

Note also that the total cost of support from all sources for an individual for student aid purposes should generally be at least the adjustment per household member used in the income protection allowance, which for 2005-2006 was $3,320. It is not reasonable to expect that a person could live on less than this amount.

 

 
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