Numerous tax benefits are related to claiming a dependent on a tax return. An additional personal exemption for each dependent can be claimed if the dependent in question meets the definition of being a qualifying child or a qualifying relative – but not both.

The qualifying child criteria always takes precedence over the qualifying relative criteria when testing for dependency eligibility. The dependent can be claimed by only one taxpayer for that year.

Qualifying Child Criteria:

Relationship: the taxpayer’s child or stepchild (whether by blood or adoption), foster child, sibling or step-sibling, or a descendant of one of these.

Residence: has the same principal residence as the taxpayer for more than half the tax year. Exceptions apply, in certain cases, for children of divorced or separated parents, temporary absences, and for children who were born or died during the year.

Age: must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year.

Support: did not provide more than one-half of his/her own support for the year. In other words, the taxpayer provided more than 50% of the dependent’s sustenance.

Joint Return: the child cannot file a joint return for the tax year unless the filing is solely to claim a refund.

Qualifying Relative Criteria:

Not a Qualifying Child: the relative cannot meet the criteria to be your qualifying child or the qualifying child of another taxpayer.

Member of Household or Relationship Test: a person lives with you all year as a member of your household or is related to you in the following ways: child, stepchild, eligible foster child, siblings, parents, grandparents, grandchildren, aunts, uncles, nieces, nephews, and in-laws. The relationship cannot violate local laws.

Gross Income Test: the person’s gross income for the year must be less than $4,200.

Support Test: you must provide more than half of the person’s total support for the tax year.

The Two Year Comparison follows your Tax Return Summary, and is right before the start of Form 1040 (your tax return). In true comparison fashion, these two pages have three columns- where you were, where you are, and the difference. Review these pages, and pay particular attention to these lines-

Line              Tax Item
Line 1            Salaries and Wages (did you forget to send a W2?)
Line 2,4         Investment Income (missing a 1099?)
Line 8            Business Income
Line 13          Rental Income (if $0, then perhaps you are phased out due to high income
Line 14, 15    S Corp, Partnership or Trust Income
Line 21          Moving Expenses
Line 28          Student Loan Interest (max $2,500, might phase out due to income.
Line 34          Charitable Donations and Contributions
Line 39          Itemized or Standard Deductions (Schedule A is discussed later)
Line 59          Estimated Tax Payments (did you make some, and forget to tell us?)
Line 67          Tax Due or Refund (negative signs are good signs.. refunds)
Line 70, 71   Effective and Marginal Tax Rates

Line            Tax Item
Line 6c        Dependents (only children 16 and younger qualify for child tax credit)
Line 7          Salaries and Wages (did you forget to send a W2?)
Line 8,9       Investment Income (missing a 1099?)
Line 12        Business Income
Line 17        Rental Income (if $0, phased out due to high income?)
Line 17        S Corp, Partnership or Trust Income
Line 26        Moving Expenses
Line 33        Student Loan Interest (max $2,500, phased out due to income?)
Line 40        Itemized or Standard Deductions (Schedule A is discussed later)
Line 45        Alternative Minimum Tax (AMT is discussed later)
Line 61        Affordable Car Act tax or penalty for health care coverage
Line 65        Estimated Tax Payments (did you make some, and forget to tell us?)
Line 76        Tax Refund
Line 76b,d   Routing and Account Numbers for Direct Deposit
Line 78        Tax Due

Line       Tax Item
Line 4     Medical Expense Deduction (must go over 7.5% or 10% of income threshold)
Line 6     Real Estate Taxes
Line 7     Personal Property Taxes (tax on auto registrations?)
Line 10   Mortgage Interest
Line 12   Mortgage Points
Line 13   Private Mortgage Insurance, PMI (income phaseouts start at $100,000)
Line 19   Charitable Donations and Contributions
Line 21   Job Related Expenses, such as Pilot, Flight Attendant, Nurse
Line 22   Tax Preparation Fees you paid for last year’s tax return
Line 23   Investment Expenses (custodial fees, safe deposit box, advisory fees)
Line 29   Total Itemized Deductions, same as Line 40 of Form 1040

Many people have businesses or partnerships where a K-1 is issued. A K-1 describes the money earned or lost with a partnership or investment, and must be reported on your tax return. There are some provisions within the tax code describing how this form is to be handled, especially losses.

With K-1s specifically, if you are an active member then losses might be deducted on the current year tax return. However, if you are an inactive member (such as the increasingly popular investment partnership) these losses cannot be deducted in the current tax year, yet are carried forward to offset future gains. More discussion might be required.

Lastly, many K-1s especially investment partnerships require a separate state tax return (where the partnership resides).

Please use our online submit forms to detail this information.

Medical expenses such as co-pays, prescriptions and out-of-pockets payments may be deducted. In addition, there are some things that are strictly not deductible such as diet pills or food, non-prescription medications, vitamins and imported drugs not approved by the FDA.

However, there are some shades of gray- dental procedures are a great example. There might be situations where a procedure such as tooth veneers could be considered both cosmetic and health-related (gingivitis prevention, toothache, etc.). More discussion would be required.

Please note that health insurance premiums (including vision and dental) generally do not qualify since these are already paid pre-tax giving you an instant tax savings. To deduct them again would be double-dipping. On rare occasions (such as business owners), your health insurance premiums might be deductible.

The 2014 tax year with Affordable Care Act will be a completely different story- contact us if you need some guidance.

Lastly, only those medical expenses that exceed 10.0% (or 7.5% if you are 65 or older) of your adjusted gross income are deductible. For example, if you earn $30,000 your medical expenses must exceed $3,000, and only that portion which exceeds $3,000 is deductible.

We understand that the issue of medical benefits and expenses is a sore spot for most clients, and the information above probably doesn’t help alleviate the bad taste. Unfortunately it is the current tax code.