(Warning – this is an overview! I’m skipping some stuff to make a point. Talk to your tax pro about your specific situation. Dependency issues are very tricky.)
I would like to suggest that parents do a little IRS prevention. My suggestion is that they talk to their children about their income tax. You need to have the talk before they file their tax return. Better yet, grab their W-2s before they see them and dollar signs.
Please understand that just because they are your kids and live in your house that you might not get to claim them as a dependent. And if they can be claimed as your dependent, you want to make sure that they understand that they can’t claim themselves.
Who can you claim? You can claim your child, step-child, foster child, brother, sister (and steps) or descendent who lived with you for more than half of 2013, was under age 19 at the end of 2013, and did not provide over half their support. If they were a full time student for 5 full months and under 24, you could still claim them since the time away at school is considered temporary if their permanent residence is with you.
The tricky part of the rules is that the child “didn’t provide over half their own support.” A teenager with a decent job could be actually providing more of their support than their parents. When we think of support, the first thing that pops into mind is the costs of providing room and board for the child. Add to that anything the parent pays for the child; insurance, cell phone, clothes, medical bills….But it also includes all the money the child spends on themselves from a job. A teen who made $8000 in 2013 and didn’t put (and leave) anything in savings could have $7000 (net income). That could be more than what the parents actually spent on them and will mean the child gets to claim their own exemption not the parents. Could a teen make $8000 working fast food? Yes, I’ve seen it and the surprised parents. This is a situation where you want to bring a tax pro in and do a support worksheet to make sure nothing is missed.
Even in situations where it’s clear that the parent can claim the exemption for their child, they need to make sure that the child understands that they can’t claim themselves. If they do, there will be problems when their parent files their return claiming them. The IRS matches Social Security numbers and if they find that a number has already been used, the second return can’t be e-filed. When one or both returns are not e-filed, the IRS will send letters out asking that the situation be reviewed and one return be amended. This will take at least six months and the taxpayer amending their return could face interest and penalties on top of the extra tax.
The key point is there is only one exemption for everyone. If the parents take it, the child can’t. This is one time when a little family communication can help keep the IRS away.