Tax Research - Memo to the File - Dependency Exemption Essay example

2333 Words Sep 2nd, 2012 10 Pages
Memorandum-to-the-File

Date: May 25, 2011 From: Brenda Hall Re: How many dependency exemptions John and Janet Baker can claim for the year?

Facts
John and Janet Baker are husband and wife and maintain a household of 7, including Janet and John. Calvin and Florence Carter are Janet’s parents, who are retired. During the year, they received $19,000 in nontaxable funds (disability income, interest on municipal bonds and Social Security benefits) from which $8,000 was equally spent between them on clothing, transportation, and recreation. The remaining $11,000 was invested in tax-exempt securities. Janet Baker paid $1,000 for her mother’s dental work and $1,200 premium on her father’s own life insurance policy. Janet’s father,
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Pursuant to the IRS Publication 501, medical insurance expenses are to be included in total support cost. However, life insurance premiums need to be excluded. Expenses that are not directly related to any one member of a household, such as the cost of food and lodging for the household, must be divided among the members of the household. A person's own funds are not support unless they are actually spent for support.

Rev. Rul. 77-282, 1977-2 provides that the FMV of an automobile that is purchased and owned by the potential dependent is to be included in the individual’s support for the year of purchase.

Pursuant to the IRS Publication 501, a full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance. Student loan obtained by the individual to be claimed as dependent should be included in calculation of the individual’s own support [Philip J. McCauley, 56 T.C. 48 (1971)].

Analysis
Section 152(d)(1)(B) provides that to qualify for a dependency exemption as a qualifying relative, the potential dependent’s gross income must be less than the exemption amount for that year. Both Calvin and Florence meet the gross income test as their non-taxable income is not included in their gross income determination. Section 152(d)(1)(C) states that to qualify as qualifying relative over one half of such

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