The best resource for determining if a dependent needs to file a tax return is IRS Publication 17. In the 2012 version of Publication 17, a handy chart that lays out the rules can be found on page 5 of Chapter 1.
Rather than reproduce the chart and fill up this blog post with a recitation of the rules, I would rather give a scenario to help explain the concepts.
- The taxpayer is 65 years old. He lives with his son and the son provides more than 1/2 of the taxpayer’s support.
- The taxpayer’s only income is: $50 of interest on a savings account; a pension of $3,000; and Social Security Benefits of $9,000.
Applying the rules relating to dependents, does this taxpayer need to file a tax return?
The rule for taxpayers age 65 or older is that they must file a return if their unearned income is more than $2,400. This taxpayer’s unearned income is $3,050 (the Social Security benefits are not taxable and so don’t count as income).
What is the tax computation?
- AGI of $3,050 – $2,400 standard deduction for dependents age 65 or older = $650.
- A dependent cannot claim a personal exemption, so there are no further adjustments to make. The taxpayer’s taxable income is $650.
- Tax owed on $650 (using the tax tables) = $66
- Everything is the same as Scenario 1 except the taxpayer is under age 65.
In this case, the tax computation is:
- AGI of $3,050 – $950 standard deduction for dependents under age 65 = $2,100 taxable income
- Tax owed on $2,100: $211
- All computations are based on 2012 rules.
- The standard deduction for dependents age 65 or older is the greater of: earned income + $300 (up to the maximum standard deduction for that year) or $2,400. For dependents under age 65, it’s: earned income + $300 (up to the maximum standard deduction for that year) or $950.
- These rules apply to anyone who is eligible to be claimed as a dependent, even if they aren’t actually claimed as a dependent. So in our example here, the taxpayer should use these rules even if his son doesn’t claim him as a dependent.
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