Here's the big tax story for 2011: Do you know who your dependents are?
That may sound silly but it's a big money question, and in this day of multi-generational households, boomerang 20-somethings, aging parents, gay marriages, blended families and domestic partnerships, it's not an easy one to answer.
Questions about who can properly be claimed as a dependent outnumber most other queries that land at TurboTax, according to Bob Meighan, vice president of Intuit, the company that produces the tax prep program.
But it's worth looking at before the end of the year, because families who may be on the cusp of some big deductions could save next April if they learn the ins and outs of this now, and handle the next few weeks right. For example, did you know that you may be able to claim your girlfriend or boyfriend as your dependent?
Once you claim someone as your dependent, you can take advantage of a slew of tax breaks for them, including a dependency exemption, medical deductions, care benefits and more.
In most cases, there are several financial tests that you have to meet before you can claim someone as a dependent. One is that in most, but not all, cases, you can't get a writeoff for someone else's expenses if they earn more than $3,700 in 2011. The second test holds that you have to pay for more than half of their support for the year.
To figure out if you're close, you can ask your tax adviser to do a rough cut of your situation before the end of the year, or you can use an online tax forecaster like EasyAs Income Tax (www.easyasincometax.com) or TaxCaster from TurboTax (here).
Those who may be on the cusp of qualifying as dependents would include grad student live-in roommates who don't make much money; returning college graduates who haven't landed jobs yet, and aging parents who have high medical expenses. Sherrill Trovato, president of the National Association of Enrolled Agents, recently took a deep dive into these rules to help taxpayers figure out the fine print. (An enrolled agent is a tax preparer who is qualified to represent clients before the Internal Revenue Service.)
Here are some of her pointers.
-- Medical costs are special. Even if a parent or child earns too much to qualify as your dependent, you can still write off their medical expenses if (a) you pay those medical costs; and (b) you pay more than half of that person's support; and (c) the expenses top 7.5 percent of your adjusted gross income. As is always the case with medical expenses, you can only deduct the amount over 7.5 percent of your adjusted gross.
-- The returning graduate may still qualify. If you have a child who finished college in May, came home, and has been job hunting ever since, you can claim them as a dependent for 2011. That's also true if your child is 30 years old, moved back into your house and is unemployed. Once the "child" turns 24, he or she is also subject to that $3,700 earnings ceiling. So if you're this far through the year and he hasn't earned that much yet, it might save your family money for him to keep his income below that level for the rest of the year.
-- If you're living with somebody, they may be your dependent. Gay couples who married in states like New York, where they are permitted to file joint returns, will have to stay separate for federal returns. But if one of them doesn't work (or earns less than that $3,700), and they lived together for the whole year, then the partner with the higher earnings can claim the low-earning spouse as a dependent. That works for heterosexual couples, too, says Trovato.
-- Divorced parents can change their minds every year. Typically children become dependents of the custodial parent, but it doesn't have to be that way. If the other parent earns a lot more and has a higher tax bracket, the custodial parent (say it's Mom) can allow the other parent to claim the kids as dependents. They can go back and forth every year, depending on how the family can benefit most.
-- Siblings can share. If you and your brother and sister all contribute to your mother's well-being, you can add up your total contributions to see if, altogether, you contribute more than half of her support. If she also earns under $3,700, then you can assign her as a dependent to one of the siblings. In most families, this gets assigned to the sibling in the higher tax bracket, who will save more and then can presumably kick in a little more for Mom next year.
That's worth doing a little math. If you all are approaching 50 percent of your mother's support now, it may be worth kicking in some extra cash and paying a few more bills before year end. Especially if Mom's income is so low she can't use the exemption herself.
(The Personal Finance column appears weekly, and at additional times as warranted. Linda Stern can be reached at email@example.com; Editing by Matthew Lewis; Linda Stern tweets at www.twitter.com/lindastern.; Read more of her work at blogs.reuters.com/linda-stern)