How to Take Advantage of Dependents at Tax Time

Not just young children can be claimed as a deduction.

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The Great Recession has dramatically changed how Americans live. In the past, young college graduates were expected to get their own place. But because of a soft job market, more and more young people are living at home and are supported by family members.

While the situation can burden parents suffering their own setbacks from the recession, it could provide a benefit: For tax purposes, those who are supported by family can be declared a dependent and used as a deduction at tax time.

[See 50 Ways to Improve Your Finances in 2012.]

Definition of a dependent. According to Karen Reed, communications director at TaxResources, Inc., the most traditional dependent is what is known as a qualifying child.

"To qualify your dependent as a qualifying child, your child, stepchild, or foster child must be under age 19, or under 24 if a full-time student," Reed says. "There is no age requirement if they are permanently and totally disabled. They must live with you for more than half the year and not provide more than one-half of their own support," or the expenses associated with everyday living.

You can also claim another's child as a dependent, Reed says, as long as the child lives with you for half of the year and makes no more than $3,700 per year (the standard deduction for a dependent). Half of the yearly support for the child must come from the person claiming the deduction.

But the definition of a dependent is not limited to children. Melanie Lauridsen, a technical manager on the American Institute of CPA's (AICPA) tax staff, says there is also a category of dependent called a qualified relative.

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This person must meet a number of criteria. He or she must be a relative, although the kind of relative is not limited. According to Lauridsen, the person can be a "brother, sister, older child, half brother or sister, brother-in-law, sister-in-law, uncle, aunt, niece, or nephew. The relationship just needs to be there." This person also must make less than $3,700 per year and live in the home for the entire year.

An elderly parent could fall into this category if all of these conditions are met. Siblings who are jointly paying for their parents' care can also claim this deduction, as long as each sibling is paying more than 10 percent of their parent's expenses. However, only one sibling at a time can claim the deduction; it rotates to the other sibling yearly.

Unfortunately, stay-at-home or out-of-work spouses cannot qualify as a dependent.

"In a situation in which there is one working spouse and one non-working spouse, both are listed in the top section of the tax return, and even the nonworking spouse can be listed first. Each member of a married couple receives an exemption that is the same amount as the exemption amount allowed for a dependent," Reed says. "In some very limited cases, a taxpayer could claim the exemption for the spouse without listing the spouse on the return, but the spouse cannot have earned even $1 or be claimed as a dependent by anyone else."

[See Married Filing Separately or Jointly: Which Is Right for You?]

The stay-at-home kid. But what about the child that returns home after four years of college and moves into his or her old room? According to Lauridsen, this child would have to meet the requirements of a qualifying relative.

"That child can not make more than $3,700 dollars of gross income per year," Lauridsen says. "If I go off to college and I come home without a job, I might qualify. But even if I had a small job, I couldn't make more than $3,700 per year."

The bad news for parents: The only way to claim a deduction on an older child at home is if the child refuses to work enough to earn $3,700 each year.