Question

Applicable Tax Year: 2019

John Q. Public (age 49) and his wife Karen (age 46) file a joint return.  They have three children:  Elizabeth (age 24) who is a full time law student at State Law School, Charles (age 21), who is a full time student at State College, and William (age 19). Charles earned $5,000 and Elizabeth earned $7,000 from summer jobs.  John and Karen provide over half the suppor for all three children.  Karen's mom (age 75), who is blind, resides in a nursing home. She received $25,000 in social security benefits.  John and Karen provide over one-half of the mom's support.  The couple received salaries totalling $150,000, qualified business income of $13,000 from a partnership investment, $4,000 of interest income from a State of IL municipal bond, and $2,000 of interest income from a savings account.  They sold their home this year for $575,000.  They initially purchased their home three years ago for $450,000.  The gain on the sale qualified for the exclusion from the sale of a principal residence.  The Jacksons incurred $23,000 of itemized deductions and had $21,500 of federal tax withheld from their paychecks.

• Determine how many dependents John and Karen can claim
• Using the income tax formula for an individual taxpayer, calculate the Jackson’s taxable income, federal tax arising from that taxable income, and any refund or balance due (note, it is important to show your work, and not just the final answers).

Answer 1

Claiming of dependents:

As per IRS publication 501, there are certain tests to determine claim of dependents

For a qualifying child

1. The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.

2. The child must be (a) under age 19 at the end of the year and younger than you (or your spouse if filing jointly), (b) under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly), or (c) any age if permanently and totally disabled.

3. The child must have lived with you for more than half of the year.

4. The child must not have provided more than half of his or her own support for the year.

5. The child must not be filing a joint return for the year (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid).

Solution:

John and Karen provide over half the support for all three children, hence point 4 is compliant for all three children. However, Elizabeth (age 24) who is a full time law student at State Law School does not qualify as a dependent since she is not under 24 as per point 2 above, Charles (age 21), who is a full time student at State College qualifies as a dependent since he is under 24 as per point 2 above, and William (age 19) does not qualify as a dependent since he is not under 19 as per point 2 above.

For a qualifying relative

1.The person can't be your qualifying child or the qualifying child of any other taxpayer.

2. The person either (a) must be related to you in one of the ways listed under Relatives who don't have to live with you (includes father,mother), or (b) must live with you all year as a member of your household (and your relationship must not violate local law).

3. The person's gross income for the year must be less than $4,200. (Gross income includes taxable social security benefits)

4. You must provide more than half of the person's total support for the year.

In the given case, the qualified relative is the mother of Karen. John and Karen provide over one-half of the mom's support. Karen's mom receives social security benefit of $25,000 which will be non taxable since one half of $25,000 is $12,500 which is below the taxable threshold of $25,000. Hence her gross income is less than $4200.

Hence John and Karen can claim 2 dependents i.e Charles and Karen's mom.