John and Janet Baker are married with three children and have accommodated Janet’s parents, Calvin and Florence Carter. The parents receive nontaxable $19,000 and spend $8,000 on clothing, transportation and recreation. Janet paid $1,000 for her mother’s dental medication and $1,200 premiums for her father’s life insurance policy. Darin, who is 18 years, is not a student but earns $14,000 per year from a part-time job of pool cleaning. He deposits the money in a savings account for future college expenses.
The 19-year-old daughter, Andrea, bought a $21,000 Camaro from the savings she established some years ago. She inherited it from her paternal grandfather. Janet should apply for tax exemption because she is catering for her mother’s medication and her father’s life insurance policy (Miller & Maine, 2010). She also accommodates them by providing shelter and food. Another Exemption should be for Morgan, who is a student (Internal Revenue Service, n.d).
When a family accommodates a 23-year-old daughter and retired parents, can the family file for taxability of exemption for both?
Internal revenue service (IRS) authors the IRS Publication 972 document to provide guidance and determine a child’s tax credit that the agency can claim (Miller & Maine, 2010). It also gives guidelines on how to calculate the earned income amount to report when applying for the Additional Child Tax Credit. The information is available in Form 1040 and forms 8812. IRS also has a worksheet that determines the eligibility of a child and the amount of money he or she can pay. But the maximum amount a child can pay is $ 1,000, and the claim is registered using Form 1040.
The Child’s Return Tax has Form 8615 titled Tax for Certain Child, Who have Unearned Income. It states that the parent should attach it to the child’s tax return when:
- The child’s unearned income was more than $2,100.
- The child meets one of the following age requirements:
- The child was under age 18 at the end of the tax year.
- The child was age 18 but less than 19 at the end of the tax year and the child’s earned income did not exceed one-half of the child’s own support for the year (excluding scholarships if the child was a full-time student), or
- The child was a full-time student who was at least 19 and under age 24 at the end of the tax year and the child’s earned income did not exceed one-half of the child’s own support for the year (excluding scholarships).
- At least one of the child’s parents was alive at the end of the tax year.
- The child is required to file a tax return for the tax year.
- The child does not file a joint return for the tax year (Internal Revenue Service, n.d).
According to the law, Darin Baker’s earning per year already exceeds the limit of $2,100 (Miller & Jones, 2013). He is 18 years old at the end of the tax year and all his parents are alive (Bukers Cash Flow Analysis, n.d.). Therefore, Darin Baker needs to pick Form 8615, fill it in and calculate the tax that he should pay. He earns $14,000. Another requirement is that his income is more than $6,300 which is the minimum exemption for dependents like him. He is also not blind. His earnings amount to an earned income which is taxable by law.
However, Janet may choose to avoid having to file a tax return for Darin and instead include his income on her tax return if:
- At the end of the tax year the child was under age 19 or under age 24, he is supposed to be a full time student.
- The child’s interest and dividend income was less than $10,500 for the tax year.
- The child had income only from interest and dividends, which includes Alaska Permanent Fund dividends and capital gain distributions.
- No estimated tax payments were made for the tax year, and no prior tax year’s tax overpayment was applied to the current tax year estimated tax, under the child’s name and social security number.
- No federal income tax was withheld from the child’s income under backup withholding.
- The child is required to file a return unless the parent makes this election.
- The child does not file a joint return for the tax year.
- The parent is the parent qualified to make the election or to file a joint return with the child’s other parent (Internal Revenue Service, n.d).
|Fig.1 Calculation of Increase in Living Expenses|
|Actual Living Expense incurred due to Fire||Normal Living Expenses (*)||Temporary Increase in Living Expenses|
|Insurance||$ 1,200.00||$ 0.00||$ 1,200.00|
|Medical||$ 1,000.00||$ 0.00||$ 1,000.00|
|Total||$ 1,300.00||$ 0.00||$ 1,300.00|
|Amount of payment includible for exemption||$ 2,500.00 (*)|
Andrea Bakers also has an unearned income amounting to $21,000. The law does not provide for taxation of gifts and inheritance unless the inheritance is in the form of assets which the beneficiary sells. Even the bank account does not have to pay tax for keeping the money (Internal Revenue Service, n.d).
Janet spent $1,000 to pay for her mother’s dental medication and $1,200 to pay for her father’s life insurance policy (Aaron, Burman & Steuerle, 2007). She is also paying for the family food amounting to $10,500 and rent of $14,000. Apart from paying rent, the family of 7 is spending $1,500 on food for Calvin. It is also spending the same amount on Florence. The expenses total to $ 17,000. It is the sum of the rent $14,000 and food $3,000.
The parents spend $8,000 on clothing, transport and recreation (Miller & Maine, 2010). Therefore, Jane meets the threshold of providing more than half of her parent’s upkeep to apply for the tax refund of $2,200 which she spends above their average expenses. She has spent $19,200 on the parents. Compared to her spouse, Janet is contributing more than 10%. Janet’s parents, Calvin and Florence, receive nontaxable income of $19,000. They are also aged above 65 years old and retired. Each of the parents meets the rules for a qualifying relative (Miller & Jones, 2013).
Taxation policies and revisions are important for the growth of a nation. However, it is the responsibility of every household to adhere to the taxation requirements. Janet’s children are not tax eligible except for Darin. Though he is 18 years old, he is getting a taxable earned income. Janet may also have to file for the tax and pay it on behalf of her son. Janet would also have to file for the exemption for the other dependents. Her children are still depending on her because they do not have any other source of income.
Bukers Cash Flow Analysis. (n.d.). Web.
Internal Revenue Service. (n.d.). Web.
Miller, J., & Jones, R. (2013). Personnel protection. Oxford: Elsevier.
Miller, J., & Maine, J. (2010). The fundamentals of federal taxation. Durham, NC: Carolina Academic Press.