Saving a Bundle on Your Taxes with an Unrelated Dependent

The following is a guest post from Harvey J. Poorbaugh, Editor of Fidelity Select Fundranker.

Are you working long hours, possibly more than one job, and supporting your significant other while she’s out of work?  Is your unemployed college buddy mooching off you during a long and unsuccessful job hunt?  Have you taken in your daughter’s soccer team buddy because her home life wasn’t working?  It’s not obvious, and it may surprise you, but you may be able to claim an unrelated person as a dependent on your 2009 federal tax return.

There are several tests to determine whether an unrelated person is your dependent.  If you and your potential dependent pass all of these tests, get ready to save a bundle on your taxes:

• Is your potential dependent a qualifying relative? It’s easy to jump to the conclusion that she isn’t a qualifying relative, because, well, she’s not related to you in any form or fashion. Take a close look at the IRA definition of a qualifying relative, however, and you’ll see that it includes, in addition to various real relatives, any other person who lived with you all year as a member of your household if your relationship did not violate local law. Note that the 2009 Form 1040 instructions list some exceptions that still count as living with you, such as going to school or on vacation. So if your potential dependent lived with you for all of 2009, and your relationship did not violate local law, you pass this test.
• Is your potential dependent a qualifying child of any taxpayer for 2009? Because she is not related to you, she’s not your qualifying child, and if she lived with you the entire year, then she can’t be a qualifying child of anybody else, either. You easily pass this test.
• Did your potential dependent have gross income of less than $3,650 in 2009? If so, you pass this test.
• Did you provide over half of your potential dependent’s support in 2009? Well, does she have some other means of support? Is the support you provide more than her other means of support? If so, you pass this test.
• Was your potential dependent a U.S. citizen, a U.S. national, a U.S. resident alien, or a resident of Canada or Mexico? If so, you pass this test.
• Was your potential dependent married? If not, you pass this test.
• Can you yourself be claimed as a dependent on someone else’s 2009 tax return? If you are providing half of your potential dependent’s support, it’s unlikely someone else is providing half of your support. You should pass this test easily.

So if you pass the above tests, just how much can you save on your taxes?  An additional dependent allows you an extra exemption, which, for 2009, shaves $3,650 off your taxable income.  If you are in the 25% tax bracket, that amounts to tax savings of over $900.  If you also are paying education expenses for your unrelated dependent, you can save big with an education tax credit. To top it off, you probably will save money on your state income tax, as well.

Comments

[Money Reasons]

Personally, the Is your potential dependent a qualifying relative? would make me a little nervous about filing an unrelated person as a dependent... But that's just me :)

[Harvey J. Poorbaugh]

When you e-file your tax return, one of the pieces of information that is checked immediately before your return is accepted is what you put down as your dependent's relationship to you. The allowed entries are: Child, Foster child, Grandchild, Grandparent, Parent, Brother, Sister, Aunt, Uncle, Nephew, Niece, None, Son, Daughter, Other. "None" is the correct entry for an unrelated dependent. "Other" would be what you put down for a relative who is not in that list, such as a cousin or a stepbrother. Since "None" is an allowed entry, it seems the IRS expects this situation to occur and is okay with it.

[bobsmith111]

Or better yet, just don't pay any taxes at all. That's what the cabinet members of the white house do.

[Super Saver]

It's definitions like these that give tax preparers job security :-)