You are allowed one exemption one exemption for yourself, one for your spouse if you are filing jointly, and one for each relative you can claim as your dependent. As of 2012, each exemption you claim represents a $3,800 deduction from your taxable income. All dependent relatives must have a Social Security number.
You can claim an exemption for a “qualifying child.” To qualify, the child must be your son, daughter, adopted child, stepchild, grandchild, foster child, sibling, adopted sibling, half-sibling, stepsibling, niece or nephew. The child must be under age 19 at the end of the tax year, under age 24 if a full-time student and younger than you or your spouse. The child can be any age if totally disabled. Your qualifying child must have lived with you for at least half the year. The child cannot have provided more than 50 percent of his or her total support, can’t have filed a joint tax return, and can’t be claimed as someone else’s dependent.
You can claim a “qualifying relative” exemption for any person who meets certain tests. Although the person is often a relative by blood or marriage, the IRS allows you to claim other, unrelated members of your household -- if they meet certain tests. The first test to be a qualifying relative is that the person cannot be a qualifying child to you or any other taxpayer. For instance, if you had a minor child who lived with your parents and meets all the tests to be their qualifying child, you cannot claim the child as a qualifying relative even if your parents didn’t claim your child on their taxes.
The residency test for a qualifying relative differs from the test for a qualifying child. Where a qualifying child must have lived with you, certain people related to you by blood or marriage don’t have to live with you to meet the tests for a qualifying-relative exemption. Those relatives include children, siblings, nieces, nephews, parents, grandparents, aunts, uncles and in-laws. But cousins and members of your household who are not related to you must have lived with you for the entire year to get a qualifying-relative exemption
The support test is different for a qualifying relative and qualifying child. For a qualifying relative exemption, your share of the total support for that person must exceed 50 percent. With the qualifying child support test, the child’s share of his or her total support must be less than 50 percent. It’s a subtle but significant difference. If no one person provides 50 percent of the total support for a qualifying relative, the two or more persons who would be able to claim a qualifying relative exemption except for the support test decide among themselves which one gets the exemption. The others must sign a statement agreeing not to claim the exemption. The person claiming the exemption must attach to his tax return Form 2120 identifying the people who agreed not to claim the exemption.
The tests for claiming a qualifying relative include a gross income test. A qualifying relative as of 2012 cannot have taxable gross income above $3,800. Nontaxable income such as Roth IRA retirement distributions or certain Social Security benefits doesn’t count as gross income for purposes of this test. The test also doesn’t count income earned by a disabled person for work performed at a sheltered workshop that provides special instruction or training to address the disability and which is run by a state or local government or tax-exempt private organization.
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