When Do Dependents Have to File a Tax Return?

ID-100147496If a person is claimed as a dependent, they may or may not need to file a tax return if they had income during the year.

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.

Scenario 1

  • 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?

Yes.

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

Scenario 2

  • 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

NOTES:

  • 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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“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”