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Tax Talk with George Saenz

Ask the tax adviser

Claiming a working child as a dependent

Dear Tax Talk:
My 18-year-old son lives at home and works. He will earn approximately $9,000 this year. When he files his tax return, I assume he should claim himself.

Since we, his parents, provide more than 50 percent of his support, are we allowed to also claim him as a dependent?

Thanks for your input.
Alice

Dear Alice:
Yours is a good question on when a parent has to stop claiming a child as a dependent. Although most parents feel that their child will always be dependent, even though some wish otherwise, there has to come a point when they don't qualify as a dependent for tax purposes.

As long as you continue to provide half of his support, you can claim your child as a dependent if he is under age 19 at the end of the year, even though he earned more than $2,800 in 2000. He, on the other hand, will not get to claim himself as a dependent on his return. He will, however, get the standard deduction of $4,400 or up to his earned income (i.e. wages), if it were less.

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You can continue to claim as dependent a child younger than 24 at the end of the year if he is a student, regardless of his income. Absent the age or student exception, you can only claim an older child as a dependent if his or her income is less than the personal exemption amount ($2,800 in 2000).

You can check out Bankrate's Tax Tip for other dependent exemption rules.

Wash sale rules and IRA fund purchases

Dear Tax Talk:
If I sell shares of a mutual fund from my regular account and buy shares of the same company in my IRA account within 30 days, is it still considered as a wash sale?
Ajay

Dear Ajay:
A very astute question. I have often wondered how the wash sale rules apply in this situation.

The intent of the wash sale rules is to prevent a taxpayer from recognizing a tax loss on the sale of a stock that he intends to reacquire shortly after, knowing that there is probably little risk in an upward swing in price between the sale and the repurchase. To discourage this tax advantage, Congress imposed a limit of 30 days on the time frame from sale to repurchase to allow the loss for tax purposes. What you want to do is minimize your risk of upward swing by reacquiring the stock in your IRA.

What's the problem with this clever idea? Well, you're trying to defeat the purpose of the law in a roundabout way and that usually doesn't sit well with the Internal Revenue Service. In an early tax case, a taxpayer sold stock at a loss and had a corporation he controlled acquire the same stock within 30 days. The court disallowed the loss since it held the plan of repurchase was part of the same transaction as the sale of the stock.

In your case, you want to capture any upward swing from the time you sell the stock. You are doing this by using your IRA, which is a tax-exempt entity. At the end of 30 days, if the stock has gone up in value, your IRA can sell the stock (tax-free of course) and you can reacquire it on the open market without risk of losing any overall value in both accounts. Since this is what the law is designed to prevent, and is similar to the controlled corporation case, I don't believe it would pass muster upon examination by IRS.

 

-- Posted: Dec. 5, 2000

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