Unit 3: Dependency Relationships Flashcards
What are the primary tests for dependency?
- Dependent taxpayer test
- Joint return test
- Citizenship or residency test
Dependent Taxpayer Test
Any taxpayer who can be claimed as a dependent can’t claim a dependent themselves. Only 1 person can claim an individual
Joint Return test
Married persons who file a joint return cannot be claimed as a dependent by another taxpayer
When does the joint return test not apply?
If the return is filed by dependent only to claim a refund and neither spouse would have tax liability l, even if separate returns were filed
Pg 85
Citizenship or Residency Test
Dependents must be a citizen or resident of the United States or a citizen or resident of Canada or Mexico.
U.S. citizens or us nationals that legally adopt a child overseas are an exception to rule as long as the child lives w taxpayer as a member of household all year.
Qualifying child tests
- Relationship test
- Age test
- Residency test
- Support Test
- Tiebreaker test(for qualifying child of 1more person)
Qualifying Child: relationship test
- must be related to taxpayer by blood, marriage, or legal adoption
- child, stepchild, adopted child
- sibling, half sibling, step sibling, (half siblings, step - etc.)
- descendant of one of above
- foster child
Adopted children treated as normal child
Qualifying Child: Age test
Dependent must be:
- under age 19 at end of the tax year
- under the age of 24 at end of tax year and a full time student
- permanently and totally disabled at anytime during year regardless of age
Child must be younger than taxpayer claiming as dependent
For joint filing, child doesn’t have to be younger than both parents, one is enough.
Qualifying Child: residency test
Must live with taxpayer for more than half’s a tax year. Home is where taxpayer regularly live - homeless shelter, traditional home etc
Exceptions of residency test for qualifying children
Divorced parents
Kidnapped children
Children born or passed during tax year
Hospitalizations that are long term
Temporary absences
What is considered a temporary absence?
Illness, college, vacation, military service, institutionalized care for a child permanently and totally disabled and incarceration in a juvenile facility
Typically assumed that child will return to home after the above is complete.
Qualifying Children: support test
- Child cannot provide more than half of their own support.
- social security benefits used by child are considered self support
- full time students don’t take full time scholarships into account when calculating support test
What is the definition of support?
Pg 89
Income actually used for living expenses.
Persons own funds not considered support unless they’re actually spent for that reason.
Ex: child’s bank savings not considered support since it was not spent
What circumstance do you apply the Tie Breaker Test?
When a child meets rules to be qualifying child for more than one person.
only 1 person can claim a child on the tax return
The Tiebreaker Rules to determine a qualifying child applies in sequence:
- Child’s parents if they file a joint return
- by the parent, if only one of the taxpayers is the child’s parent
- by the parent with whom the child lived the longest during the year
- by the parent with the highest AGI, if the child lived w each parent for the same length of time during the tax year
- by the taxpayer with the highest AGI, if neither of the child’s parents can claim the child as a qualifying child
- by a taxpayer with a higher AGI than either of the child’s parents who can also claim the child as a qualifying child but does not
When do you use the Qualifying Relative designation?
- individuals not considered family members can be a qualifying relative
- any age
- used when tests for qualifying child not met
What are the tests to determine a Qualifying Relative?
- Not a qualifying Child Test
- Member of household or relationship test
- Gross income test
- Support test
Qualifying Relative: “Not a qualifying child” test
- taxpayers can’t claim an individual who can be claimed dependent on another tax return pg 90
- may qualify as taxpayer’s dependent under tests for qualifying relative, even if that child is QC for another taxpayer. If….
- child’s parent is not required to file income tax return, and either does not file a return
- only files to get a refund or income tax withheld or estimated tax paid
QR: Member of Household or Relationship test
Dependent not related to taxpayer must have lived with the taxpayer the entire tax year in order to meet the member of household or relationship test.
What are the exceptions to the Member of Household or Relationship test?
- family members don’t have to live w/ the taxpayer to meet test:
- child, step child, foster, descendant (grand child)
- sibling, step and half
- parent, grand, step, a direct ancestor (not foster parent)
- niece, nephew, son and daughter in law, mother, brother, sister in law
Taxpayers may not claim
Housekeepers or other household employees even if the employee lives with the taxpayer all year
QR: Relationships established by marriage does not end as a result of death or divorce
Ex: if taxpayer supports mother in law, taxpayer can continue to claim her as a dependent even if he and his ex spouse are divorced or if he later becomes widowed
QR: Gross Income Test
- Dependent’s gross income for tax year must be less than threshold amount.
- qualifying relative can’t earn more than deemed exception amount: $4400 in 2022
- there are no gross income tests for qualifying child
Define “Gross Income”
Income in the form of money, property, and services not exempt from tax
QR: Support test
- taxpayer must provide more than 1/2 of the dependent’s total support during the year.
What does support include in the “Support Test” for a Qualifying Relative?
- food, clothing, shelter, education, medical, and dental care. Includes amounts from social security and welfare payments even if support is nontaxable
- fair market value of housing
- Different from qualifying child definition
Dependent supported by divorced, separated parents or live apart
- can be claimed by custodial parent
- custodial parent can permit noncustodial parent to claim but must use a Form 8332
A child may be treated as a qualifying child for the Noncustodial parent if…
- Parents divorced or legally separated or if lived apart at all times during last 6 months of year
- Child received over half of his/her support for the year from the parents
- Child in custody of one or both parents
- Custodial parent signs form 8332 and noncustodial attaches declaration to their return
** does not determine head of household filing or eligibility for earned income tax credit; only custodial parent can do this**
Physical custody of child majority of the year determines who has custody of child if not specified during divorce
Equal amount of nights shared between parents means
The custodial parent is the parent with a higher AGI
Custodial parent can revoke release via form 8332.
- must be attached to taxes, must be provided a copy to noncustodial parent - or make reasonable effort to provide a copy
Custodial parent must keep a copy for evidence to provide a copy or ahead notice
- the earliest revocation will apply is the year following the year the revocation was provided to noncustodial parent
Multiple Support Agreements
When 2 or more people jointly provide for a person’s support.
Happens when adult children take care of their parents. Under a multiple support agreement, family members together must pay more than half of persons total support but no one member individually may pay more than half
Form 2120
Multiple support declaration form used to report multiple support arrangement
Form acknowledges they don’t pay more than half the cost of supporting a dependent but that other individuals who share costs allow the taxpayer to claim that person as a dependent
Taxpayer who claimed dependent must provide more than 10% of persons support. Only one family member can claim a dependent in a single year but different qualifying family members can agree to claim dependent in other years.
What is a scholarship?
A grant of financial aid intended to help fund a student’s college studies.
What is a fellowship?
A similar grant, usually designated to help the recipient conduct some form of study or research.
Are scholarships and fellowships taxable?
They are tax-free to the student if the student is a candidate for a degree at an eligible educational institution and uses the money for qualified education expenses.
What are At-Risk Rules?
Special rules limiting the taxpayer’s deductible business, partnership, S corporation, or real estate loss to cash invested plus debt they are legally obligated to pay, and the adjusted basis of any property contributed.
What is the Cost Method of Inventory Valuation?
Valuing inventory purchased during the year at cost; the invoice price less any discounts plus transportation or other costs incurred in acquiring the merchandise.
What is the Cost of Goods Sold?
Beginning inventory plus direct purchases, direct labor costs, and overhead costs less withdrawals for personal use and ending inventory. Sole proprietors compute their cost of goods sold in Part III of Schedule C (Form 1040).
What is FICA?
The law that provides for social security and medicare benefits, financed by payroll taxes imposed equally on the employer and employee.
What is the Hybrid Method of Accounting?
A combination of accounting methods, usually of the cash and accrual methods.
What is an Independent Contractor?
A taxpayer who contracts to do work according to their own methods and who is not subject to control except as to the results of such work.
What is the Lower of Cost or Market Method of Inventory Valuation?
Inventory valuation considering the actual cost or replacement cost of merchandise on the inventory date, using the lower value.
What is a Partnership?
A form of business in which at least two or more taxpayers combine money and skill to conduct business as co-owners.
What is a Proprietorship?
A business controlled and operated by one person.
Who are Self-Employed Individuals?
Taxpayers who work for themselves, deciding when, how, and where to work.
What is a Statutory Employee?
A worker treated as an employee for social security and medicare tax purposes and as self-employed for income tax purposes.
What is considered a self-employed taxpayer?
Direct seller, independent contractor, sole proprietor.
What is a Direct Seller?
An individual who sells consumer products to others on a person-to-person basis outside of the established retail location.
What is a Gig Worker?
Someone who participates in an activity that provides on-demand work, services, or goods, often through a digital platform.
What is Form 1065?
U.S. Return of Partnership Income, used when a taxpayer and spouse own and operate a business.
What is a qualified joint venture?
If the taxpayer and spouse materially participate as the only members of a jointly-owned business and file a joint return, they can elect to be taxed as this.
What is an Accounting Period?
The 12-month period a taxpayer uses to determine federal income tax liability.
What is a Calendar Tax Year?
An annual accounting period made up of 12 consecutive months, beginning January 1 and ending December 31.
What is a Fiscal Year?
An accounting year ending on the last day of any month except December.
What is the Cash Method?
Only income actually or constructively received during the tax year is included, and only expenses paid during the year are deducted.
What is the Accrual Method?
Reporting income, total sales, and total charges for services in the tax year included in income, regardless of when payment is received.
What is the Hybrid Method?
A method where small business taxpayers may use the cash method for operating expenses.
What is Line G?
It is important to ask if the proprietor materially participates in the business.
What is Line H?
Mark this box if the business was started or acquired during the tax year.
What is Form 1099-NEC?
Issued to a taxpayer that received at least $600 in nonemployee compensation during the year.
What is Form 1099-K?
Used to report the amount of payments and transactions from online platforms.
What is Form 1099-MISC?
Required to be issued to a taxpayer who has received certain payments or made direct sales of consumer products.
What is Bartering?
The exchange of goods or services, considered taxable income.
What are Returns and Allowances?
Amounts included in gross receipts that were refunded to customers.
What is Gross Profit?
Gross receipts minus returns and allowances and cost of goods sold.
What are Ordinary Expenses?
Common and accepted expenses in the general industry or type of activity.
What are Necessary Expenses?
Expenses appropriate and helpful in furthering the taxpayer’s business or income-producing activity.
What is the Actual Expenses (Regular Method)?
The method of deducting automobile expenses based on actual costs incurred.
What is the Standard Mileage Rate?
An annual deduction based on a set number of cents per mile for qualified business use of the taxpayer’s vehicle.
What are Commission and Fees?
Amounts paid to other individuals or businesses for services not included on any other line of Schedule C.
What is Contract Labor?
Payments made to independent contractors and subcontractors for services rendered.
What is Depletion?
The process by which the cost of a natural resource is recovered upon extraction and sale.
What is Depreciation?
Business property with a useful life of more than one year is depreciated to recover the cost annually.
What are Employee Benefit Programs?
Amounts contributed by the employer to employee fringe benefit programs that are deductible.
What is Insurance (other than health)?
Premiums paid to protect the business against losses are deductible as an operating expense.
What is Mortgage Interest?
Mortgage interest reported on a Form 1098 for business-use real property.
