Module 4: Dependents

Educational Standards

State and National Standards

Time Frame

One to two hours

Curriculum Area(s)

• Technology
• Civics/Government
• Family and Consumer Sciences
• History/Social Studies
• Economics

Purpose

To help students understand who is a dependent and how the number of dependents affects taxable income

Objectives

Students will be able to:

• explain how the dependency exemption affects taxable income.
• apply the seven dependency tests to determine whether a person can be claimed as a dependent.

Background

A dependent is a person other than the taxpayer or spouse who entitles the taxpayer to claim a dependency exemption. Each dependency exemption decreases income subject to tax by the exemption amount. The exemption amount for 2014 is $3,950.

A dependent may be either a "Qualifying Child" or a "Qualifying Relative."

A. To claim a dependency exemption for a qualifying child, all of the "qualifying child" dependency tests must be met:

• Dependent Taxpayer Test
• Joint Return Test
• Citizen or Resident Test
• Relationship Test
• Age Test
• Residency Test
• Support Test

B. To claim a dependency exemption for a qualifying relative, the person must meet the following tests:

• Dependent Taxpayer Test
• Joint Return Test
• Citizen or Resident Test
• Not a Qualifying Child Test
• Member of Household or Relationship Test
• Gross Income Test
• Support Test

Key Terms

Citizen or Resident Test

Assuming all other dependency tests are met, the citizen or resident test allows taxpayers to claim a dependency exemption for persons who are U.S. citizens, U.S. resident aliens, or U.S. nationals or who live in Canada or Mexico for some part of the year.

dependent

A person, other than the taxpayer or spouse, who entitles the taxpayer to claim a dependency exemption.

dependency exemption

Amount taxpayers can claim for their eligible dependents. Each exemption reduces the income subject to tax. The exemption amount is a set amount that generally changes annually.

exemption amount

Amount taxpayers can claim for themselves, their spouses, and eligible dependents. There are two types of exemptions-personal and dependency. Each exemption reduces the income subject to tax. The exemption amount is a set amount that generally changes annually.

gross income

Money, goods, services, and property a person receives that must be reported on a tax return. Includes unemployment compensation and certain scholarships. It does not include welfare benefits and nontaxable Social Security benefits.

support

For dependency test purposes, support includes food, clothing, shelter, education, medical and dental care, recreation, and transportation. It also includes welfare, food stamps, and housing provided by the state. Support includes all income, taxable and nontaxable.

Opening the Lesson

Hand out Fact Sheet-Dependents. Use the following questions to prompt students to share their knowledge of dependents: (Handle these questions carefully because, in some situations, this issue causes ongoing disagreements, especially in cases of divorce or separation.)

• What does it mean to claim someone as a dependent on a tax return? (The taxpayer can reduce taxable income for each dependent claimed.)
• In what situations should a taxpayer be able to claim a person as a dependent? (In general, dependency exemptions are allowed for family and household members who are young, who do not make very much money, and who are supported by the taxpayer.)

Note: For students who may want to work independently on this module, refer them to Student Lesson-Dependents.

Developing the Lesson

Direct students to Tax Tutorial-Dependents, and explain that this tax tutorial focuses on dependents. Tell students that they will learn how a dependency exemption affects taxable income and how to determine whether a person can be claimed as a dependent. Emphasize a person can be claimed as a dependent on only one tax return.

Concluding the Lesson

After students have completed Tax Tutorial-Dependents and Simulation 4A-Identifying Dependents as a Single Taxpayer, Simulation 4B-Identifying Dependents as a Single Taxpayer with Children, and Simulation 4C-Identifying Dependents, ask whether they have questions about dependents. To ensure that they understand the material, ask the following questions:

• Does a dependent have to be a relative? (not if the dependent meets the member of household test)
• Does a dependent have to be a U.S. citizen or resident? (not if the dependent meets the resident of Canada or Mexico test or if the dependent qualifies for a temporary absence)
• Can a dependent have taxable income of more than the exemption amount? (yes, if the taxpayer is under 19 years of age at the end of the year or under 24 years of age at the end of the year and is a full-time student)