Net income provides a more accurate account of the financial status. Here’s why.
What is a dependent?
A dependent is an individual supported financially by another.
Dependents are generally spouses and unmarried, adopted, foster, biological or stepchildren. But they can also be relatives or roommates.
For tax purposes, a child has to meet certain tests to qualify as a dependent. The relationship test requires that the dependent be a biological child, stepchild, foster child or adopted child, or a sibling or step-sibling, nephew, niece or grandchild.
As a dependent, a child must also meet other tests, including the residency test (minimum six months a year with the claiming taxpayer); age test (under age 19, or under 24 if away at college); support test (child provided less than half of his or her own support).
There are certain exceptions to the rules. For example, for disabled persons, the age test does not apply. The residency test is also waived in certain circumstances.
For tax purposes, qualifying relatives can also be dependents. They, too, must meet certain tests. For instance, they cannot be the taxpayer’s qualifying child, nor can they be anyone else’s dependent.
Qualifying relatives should be related to the claiming taxpayer or, if not related, have lived with the taxpayer for the full tax year. And the taxpayer should have provided more than half of the dependent’s support. In addition, the qualifying relative’s income cannot exceed the exemption amount, which in 2017 is $4,050.
Qualifying relatives do not necessarily have to live with the claiming taxpayer, but again, they must meet certain tests. Such relatives who live elsewhere include a grandchild, sibling, step-sibling, step-parent, nephew, niece, uncle, aunt or any in-law, even after a marriage ends in divorce or death. And again, qualifying relatives must meet certain other tests.