Memorandum to File
Date: September 9, 2015
From: Christine Myers
Re: Mary and Livvie---Dependents or Not?
FACTS:
Mary, a single mother to her daughter, Livvie, is living at home with her parents. She
works as an independent contractor tutoring college students. Aside from the modest
amount of rent she pays to her parents every month for rent, she is saving money that she
earns in an attempt to move out of her parents’ home, and into an apartment she can share
with Livvie. Additionally, while Mary does receive a sporadic monthly payment from
Livvie’s father for her care, Mary is paying for Livvie’s clothing and any vacations they
may take. Mary’s parents do buy Livvie toys and presents, and have taken care of Livvie
while Mary is at work.
Mary’s father is upset that Mary and Livvie will be moving into their own apartment in
the next year, as this means he will lose his ability to claim them both (Mary and Livvie)
as his dependents.
ISSUES:
 Who can/should claim Mary and/or Livvie as a dependent for an exemption on
their tax return?
 Can Mary claim herself and Livvie for the past tax year?
 If so, could she have previously done so in past years?
APPLICABLE LAW:
§ 151(c) ADDITIONAL EXEMPTION FOR DEPENDENTS.---An exemption
amount for each individual who is a dependent (as defined in section 152) of the taxpayer
for the taxable year.
151(d)(1) IN GENERAL.--- Except as otherwise provided in this subsection, the
term “exemption amount” means $2,000.
Rev. Proc. 2013-35
(1) For taxable years beginning in 2014, the personal exemption amount under
§151(d) is $3950.
§152(a) IN GENERAL.---For purposes of this subtitle, the term “dependent” means--152(a)(1) a qualifying child, or
152(a)(2) a qualifying relative.
152(b) EXCEPTIONS.---For the purposes of this section--152(b)(1) DEPENDENTS INELIGIBLE.---If an individual is a dependent of a
taxpayer for any taxable year of such taxpayer beginning in a calendar year, such
individual shall be treated as having no dependents for any taxable year of such
individual beginning in such calendar year.
152(c) QUALIFYING CHILD.---For purposes of this section--MMK
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152(c)(1) IN GENERAL.---The term “qualifying child” means, with respect to
any taxpayer for any taxable year, an individual--152(c)(1)(A) who bears a relationship to the taxpayer described in paragraph (2),
152(c)(1)(B) who has the same principal place of abode as the taxpayer for more
Than one-half of such taxable year,
152(c)(1)(C) who meets the age requirements of paragraph (3),
152(c)(1)(D) who has not provided over one-half of such individual’s own
support for the calendar year in which the taxable year of the taxpayer begins, and
152(c)(1)(E) who has not filed a joint return (other than only for a claim of
refund) with the individual’s spouse under section 6013 for the taxable year
beginning in the calendar year in which the taxable year of the taxpayer begins.
152(c)(2) RELATIONSHIP.---For purposes of paragraph (1)(A), an individual bears a
relationship to the taxpayer described in this paragraph if such an individual is--152(c)(2)(A) a child of the taxpayer or a descendant of such a child, or
152(c)(2)(B) a brother, sister, stepbrother, or stepsister of the taxpayer or a
descendant of any such relative.
152(c)(3) AGE REQUIREMENTS.--152(c)(3)(A) IN GENERAL.--- For purposes of paragraph (1)(C), an individual
meets the requirements of this paragraph if such individual is younger than the taxpayer
claiming such individual as a qualifying child and--152(c)(3)(A)(i) has not attained the age of 19 as of the close of the
calendar year in which the taxable year of the taxpayer begins, or
152(c)(3)(A)(ii) is a student who has not attained the age of 24 as of the
close of such calendar year.
152(c)(4) SPECIAL RULE RELATING TO 2 OR MORE WHO CAN CLAIM
THE SAME QUALIFYING CHILD.--152(c)(4)(A) IN GENERAL.--- Except as provided in subparagraphs (B) and
(C), if (but for this paragraph) an individual may be claimed as a qualifying child by 2 or
more taxpayers for a taxable year beginning in the same calendar year, such individual
shall be treated as the qualifying child of the taxpayer who is---
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152(c)(4)(A)(i) a parent of the individual, or
152(c)(4)(A)(ii) if clause (i) does not apply, the taxpayer with the highest
adjusted gross income for such taxable year.
152(d) QUALIFYING RELATIVE.---For purposes of this section--152(d)(1) IN GENERAL.---The term “qualifying relative” means, with respect
to any taxpayer for any taxable year, an individual--152(d)(1)(A) who bears a relationship to the taxpayer described in paragraph (2),
152(d)(1)(B) whose gross income for the calendar year in which such taxable
year begins is less than the exemption amount (§151(d), Rev. Proc. 2013-35)
152(d)(1)(C) with respect to whom the taxpayer provides over one-half of the
individual’s support for the calendar year in which such taxable year begins, and
152(d)(1)(D) who is not a qualifying child of such taxpayer or of any other
taxpayer for any taxable year beginning in the calendar year in which such taxable
year begins.
152(d)(2) RELATIONSHIP.--- For purposes of paragraph (1)(A), an individual bears a
relationship to the taxpayer described in this paragraph if the individual is any of the
following with respect to the taxpayer:
152(d)(2)(A) A child or a descendant of a child.
152(d)(2)(B) A brother, sister, stepbrother, or stepsister.
152(d)(2)(C) The father or mother, or an ancestor of either.
152(d)(2)(D) A stepfather or stepmother.
152(d)(2)(E) A son or daughter of a brother or sister of the taxpayer.
152(d)(2)(F) A brother or sister of the father or mother of the taxpayer.
152(d)(2)(G) A son-in-law, daughter-in-law, father-in-law, mother-in-law,
brother-in-law, or sister-in-law.
152(d)(2)(H) An individual (other than an individual who at any time during the
taxable year was the spouse, determined without regard to section 7703, of the
taxpayer) who, for the taxable year of the taxpayer, has the same principal place
of abode as the taxpayer and is a member of the taxpayer’s household.
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§24 CHILD TAX CREDIT.
24(a) ALLOWANCE OF CREDIT.
There shall be allowed as a credit against the tax imposed by this chapter for the
taxable year with respect to each qualifying child of the taxpayer for which the
taxpayer is allowed a deduction under section 151 an amount equal to $1,000.
ANALYSIS:
There are necessary tests that need to be applied in this situation to first determine who is
a dependent, whether they be a qualifying child or qualifying relative under Internal
Revenue Code §152(a)1.
Clearly, Mary’s parents had been claiming her and Livvie as exemptions on their taxes in
previous years. For the tax year 2014, this would equate to a taxable income reduction of
$7,900 (2 x $3,950), in addition to the two exemptions already claimed for her father and
mother. This is a pretty sizeable reduction in taxable income, one which would benefit
Mary in her attempt to obtain an apartment for herself and her daughter.
For each fact in the case, we must analyze who can claim not only Livvie, but Mary as
well, as per Rev. Proc. 2013-352, each exemption is valued at $3,950, which will lower
the amount of taxable income. This analyzation must begin by determining who is
allowed to claim them, as determined by Internal Revenue Code.
As per §152(b)(1)3, if you can be claimed as a dependent on someone else’s tax return,
you are not eligible to claim yourself or a dependent. So, if Mary can be claimed by her
parents, she cannot claim herself or Livvie. So, we need to check if she can be claimed
by her parents by looking at Internal Revenue Code qualifications for dependent child or
relative. To claim Mary as a qualifying child, four tests must be met: Relationship test,
Residency test, Age test, Support test. To claim Mary as a qualifying relative, she must
not qualify as a child of her parents or any other taxpayer, must be related to parents in a
way listed under §152(d)5, her gross income must be under $3,950 (Rev. Proc. 2013-352),
and more than half of Mary’s support must be provided by her parents.
EXEMPTION FOR QUALIFYING CHILD: MARY (In regard to her parents.)
TEST TO BE A QUALIFYING
DOES INDIVIDUAL QUALIFY?
CHILD §152(c)4
Relationship?
YES
Age? (Under 19 at EOY or under 24 and a NO
student at EOY)
Residency?
YES (Mary and Livvie lived in same
residence with Mary’s parents for the
year.)
Support?
YES (If Saving her money, and not used
for her own support.) NO (If not saving
and supporting herself.)
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Join return NOT filed with spouse
YES (Mary is a single mother.)
In this situation, it would seem simple that Mary is not a qualifying child of her parents,
simply because of the age test. Mary is not under 19 at the end of the tax year, or under
24 and a student at the end of the tax year. So, we test to see if Mary is a qualifying
relative of her parents.
EXEMPTION FOR QUALIFYING RELATIVE: MARY
TEST TO BE A QUALIFYING
DOES INDIVIDUAL QUALIFY?
RELATIVE §152(d)
Not a qualifying child?
YES (Does not qualify due to age.)
Relationship?
YES
Gross income less than exemption amt.?
More info is needed, but if Mary is
working as a tutor, more than likely she
has made more than the exemption
amount of $3,950. (Rev. Proc. 2013-35)
Provided more than half of support for the YES (If saving her money, and not used
person for the year?
for her own support.) NO (If not saving
and supporting herself.)
After analyzing the answers to the qualifying child and qualifying relative tests, it is more
than likely that due to her gross income and the fact that Mary’s gross income is more
than $3,950, Mary may not be claimed by her father for the last year. (For that matter, he
more than likely should not have been claiming her for past years if he was doing so.)
EXEMPTION FOR QUALIFYING CHILD: LIVVIE (In regard to grandparents)
TEST TO BE A QUALIFYING
DOES INDIVIDUAL QUALIFY?
CHILD §152(c)4
Relationship?
YES
Age? (Under 19 at EOY or under 24 and a YES
student at EOY).
Residency?
YES (Mary and Livvie lived in same
residence with Mary’s parents for the
year.)
Support?
YES (Livvie does not provide her own
support.)
Join return NOT filed with spouse
YES (No spouse.)
Livvie is a qualifying child of her grandparents, so the qualifying relative test is not
necessary to check and see if they can claim an exemption for themselves.
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EXEMPTION FOR QUALIFYING CHILD: LIVVIE (In regard to her mother, Mary)
TEST TO BE A QUALIFYING
DOES INDIVIDUAL QUALIFY?
CHILD §152(c)4
Relationship?
YES
Age? (Under 19 at EOY or under 24 and a YES
student at EOY).
Residency?
YES (Mary and Livvie lived in same
residence with Mary’s parents for the
year.)
Support?
YES (Livvie does not provide her own
support.)
Join return NOT filed with spouse
YES (No spouse.)
If both the grandparents and Mary qualify to claim Livvie as a dependent, then, generally,
Livvie would be considered the qualifying child of Mary, under Internal Revenue Code
§152(c)(4)(A)(i)7.
CONCLUSION
Clearly, we want to make sure to include the optimum allowable number of exemptions
and credits when filing taxes, in order to lower taxable income.
Because Mary is the client, we are tasked with finding an optimal solution for her that
will maximize wealth while minimizing taxes, it would be in her best interest financially,
regardless of whether she is saving money for an apartment, to claim an exemption for
herself, and for her daughter Livvie, thereby reducing her taxable income for the tax year
2014 by $7,900. Further, this will also enable her to utilize the child tax credit, which
will further reduce her taxable income by $1,000 for each qualifying child (Livvie) under
Internal Revenue Code §24(a)6.
Unfortunately this means that for Mary’s parent’s they will not be able to claim either
Mary or Livvie. They cannot claim Mary because she is not a qualifying child or relative
for them. They also cannot claim Livvie because although she is a qualifying child, she
is also a qualifying child for Mary, so therefore, Mary is entitled to claim Livvie as her
biological parent under Internal Revenue Code 152(c)(4)(A)(i)7.
Further, this brings up the issue of past tax returns. If Mary’s father did indeed claim
them on past tax returns, whilst Mary herself did not, they might want to consider
amending their past tax returns to adjust for the exemptions and child tax credit. These
actions would, of course, benefit Mary, and be a detriment to her parents. Emotional
reasons and implications aside, this would be the best financial course of action, however,
should this pose a threat to the relationship between Mary and her father, this might be
reconsidered.
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1§152(a)
2Rev.
Proc. 2013-35
3§152(b)(1)
4§152(c)
5§152(d)
6§24(a)
7§152(c)(4)(A)(i)
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