Can I Claim My Parents as Dependents With Unearned Income?
Taking care of your elderly parents might be your duty, but it can be costly. You may be able to claim your parents as dependents even if they have unearned income as long as that income does not exceed the annual limit and you meet the other criteria to claim them as dependent relatives. If so, your tax bill goes down because each exemption you claim lowers your taxable income for the year.
Gross Income Limits
The Internal Revenue Service allows you to claim your parent as a dependent only if his gross income for the year is less than the value of an exemption. As of 2012, each exemption is worth $3,800. Gross income includes all taxable income, so unearned income such as interest, dividends or capital gains counts toward that limit. However, exempt income, such as the exempt portion of Social Security benefits, does not count. For example, if your dad has $3,000 in interest income for the year, he meets the gross income test. However, if he has $5,000, you can't claim him as a dependent.
You must also meet the support test to claim your parents. The dependent relative support test requires that you provide more than half your parent's support. Support includes basically any living expense, such as housing, food, clothing, medical care, transportation and recreation. When figuring whether you meet the test, include only amounts paid. For example, say your mom's total support is $30,000. You must pay more than $15,000 of the expenses to meet the support test.
Member of Household
The list of criteria for claiming a dependent relative includes a requirement that the person live with you as a member of your household for the entire year. However, parents, including stepparents and parents-in-law, are an exception and do not have to live with you.
No Tax Liability
If your parents are still married, you can't claim either one if they file a joint return unless they're filing only to get a refund and neither spouse would owe taxes if they filed separately. For example, if your parents file a joint return because your father owes income taxes on his IRA distributions, you can't claim your mother even if she doesn't owe any taxes or have any income.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."