If 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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