Exemptions reduce your taxable income by $3,800 each for the 2012 tax year. You typically can take a personal exemption for yourself and another for your spouse, if you file a joint return. You can also take an exemption for your dependents, who may be your children or your relatives. While you might think of dependent children and relatives as being related by blood or marriage, in the eyes of the Internal Revenue Service, that is not always the case.
In some cases your dependent child does not have to be related to you by blood or marriage. For example, you can claim an adopted child, one that has been placed with you for legal adoption, as your own child. You can claim as a dependent child a foster child who is placed with you by a court order, judgment or an authorized placement agency.
A qualifying relative does not have to be related to you either by blood or marriage, provided that the individual meets the IRS' four tests. A qualifying relative is a dependent who is not your qualifying child or any other person's qualifying child, that lives in your home as a member of your household, that you support and who has limited income.
Member of Household
Certain qualifying relatives, such as your parents, don't have to live in your home to be your dependents. Individuals who are not related to you must live in your home as a member of your household in a relationship that does not violate local law to meet the IRS' member of household test. For example, if your girlfriend lived with you in your home for the whole year, and meets the IRS' other tests, you can claim her as a dependent, even though she is not related to you by blood or marriage.
The IRS limits the amount of gross income a qualifying relative can receive and still be claimed as a dependent. For the 2011 tax year the amount of income your non-relative dependent could receive in the form of money, property and services that was not exempt from tax was $3,700. You cannot claim as a dependent a person who is the dependent of your non-relative dependent. For example, if a woman and her child live in your home as members of your household, and the woman or another person can claim that child as a dependent, you cannot claim the child even if you claim the woman as your qualifying relative.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.