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George Saenz, the Bankrate.com Tax Talk columnist Claiming the income of dependents

Dear Tax Talk,
I legally became the guardian of my niece and nephew in August of 2006. They have lived with me since July 2, 2006. They both collect Social Security Survivors benefits, which come in my name for them. My question is: Do I have to include them on my taxes? I file as head of household and have another dependent. My income was $36,000. Thanks!
-- Lori

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Dear Lori,
I believe your concern has to do more with their income rather than if they qualify as your dependents. A child's income is his or her own, and is not the income of the person who claims the child as a dependent. Children with gross incomes that exceed certain amounts and types are required to file separate tax returns and pay their own taxes.

Table 2 of Publication 501 explains, on Page 3, the filing requirements for dependents. It is the parents' or guardian's responsibility and liability to make sure that the child files and pays his or her taxes.

If the only income that your niece and nephew have is from Social Security benefits, they will not be required to file and, whether or not you can claim them as dependents, their income does not go on your tax return.

In order to claim your niece and nephew as your dependents for 2006, they have to be considered your qualifying children or qualifying relatives.

Qualifying a child
There are five tests that must be met for a child to be your qualifying child.
5 tests for claiming dependents
1. Relationship.
2. Age.
3. Residency.
4. Support.
5. Special test for qualifying child.

The residency test requires that the child live with you for more than half the year. Since you are just a few days' short of this test, the other tests do not matter and your niece and nephew would not be qualifying children for 2006 but could be for 2007.

Under the qualifying relative test, you can claim the niece and nephew as dependents even though they did not live with you for more than half the year if you provided more than half their support for the year. Total support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. You determine whether you have provided more than half of a person's total support by comparing the amount you contributed to that person's support with the entire amount of support that person received from all sources.

This includes support the person provided from his or her own funds, such as the Social Security benefits. A person's own funds are not support unless they are actually spent for support. For example, if you saved their support in a separate account for them, then it would not be counted as funds provided by them for their support.

You should consult an accountant to see if they can be considered your dependents in 2006.

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "taxes" as the topic.

Bankrate.com's corrections policy-- Posted: Jan. 25, 2007
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