Tax Exemptions for Dependents and Filing Status in Multigenerational Households

According to a Pew Research Center report in 2010, about one in five adults ages 25 to 34, and one in five adults ages 65 and older now live in multigenerational households. The number of multigenerational family households grew by 2.6 million from 2007 to 2008. While there are various reasons for families to decide to live together, the significant increase during that period coincides with a time of high unemployment and rising foreclosures.

The financial interdependencies in a multigenerational household may lead to questions when it comes time for the members to prepare their individual income tax returns. These interdependencies can affect who claims who as a dependent and in some cases may affect the filing status, such as who can file as head of household.

According to the IRS, there are general requirements for claiming an exemption for a dependent. Someone who can be claimed as a dependent cannot claim a personal exemption on his or her own tax return. And someone who can be claimed as a dependent by another person cannot claim anyone else as a dependent. For example, if you have a child and live with your parents, if you parents can claim you as a dependent, you could not claim an exemption for yourself or for your child. But your parents may be able to claim the grandchild as a dependent.

Generally you cannot claim an exemption for a married person who files a joint return. There is an exception if the couple files a joint return only to claim a refund of excess tax withheld. The other general requirement is that the dependent must be a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico. But if you adopt a child, this requirement does not have to be met if the child lives with you as a member of your household all year.

Qualifying child

In order to be a qualifying child for purposes of claiming an exemption, the child must be under age 19 or under age 24 if the child is a full-time student. If the child is permanently and totally disabled there is no age requirement. The child must have lived with you for more than half the year. But this does not include temporary absences, such as for education, illness, business, vacation, military service, or children who live part of the year with each parent when the parents are divorced or separated, or living apart. And the child must not have provided more than half of his or her own support.

In an extended family household you should keep in mind that a qualifying child for purposes of the tax exemption can be your son, daughter, step child, foster child, grandchild, great grandchild, brother, sister, half brother, half sister, stepbrother, stepsister, nice, nephew, or any of their descendants.

When you have an adult child living with you in your home, you may be able to claim an exemption for the child as a qualifying child if you meet the requirements above. If not, you may be able to claim the child as a qualifying relative.

Qualifying relative

Normally, to be a qualifying relative, the person must live with you in your home all year, except for temporary absences, or be related to you. For example, a partner who lives with you can qualify as a dependent if you meet the other tests. But if the person is related to you, he or she does not have to live with you in order to be able to claim the exemption. The relatives that qualify under this rule include your child, stepchild, foster child, grandchild or great grandchild, brother, sister, half brother, half sister, stepbrother, stepsister, father, mother grandparent or great grandparent, stepfather, stepmother, niece, nephew, aunt, uncle, and in-laws.

A qualifying relative's gross income for the year must not be more than the exemption amount ($3,650 in effect for 2010). Gross income for this purpose includes all income that is not exempt from tax. So, for example, certain social security benefits that are tax-exempt would not be included. And you must have provided more than half the person's total support for the year.

Filing status

If you live in a multigenerational household and are not married filing jointly, you may be able to file as head of household. To qualify, you must be unmarried, you must have paid more than half the cost of keeping up the home, and you must have a qualifying person living with you for more than half the year except for temporary absences.

A qualifying child for purposes of claiming an exemption qualifies you to file as head of household if he or she is single, regardless of whether you can actually claim the exemption. If the qualifying child is married, you qualify to file as head of household only if you can claim an exemption for the child. If you can claim an exemption for your father or mother, you qualify to file as head of household if you meet the other tests. A dependent parent does not have to live with you.

Other relatives such as brothers, sisters, grandchildren or grandparents, can qualify you to file as head of household if the relative lived with you in your home for more than half the year and you can claim an exemption for the relative. Persons who live in your home but are not related to you do not meet the test as a qualifying person in order for you to file as head of household, even if you can claim an exemption for them.

Sources:
Publication 501 - Exemptions, Standard Deduction, and Filing Information - IRS
The Return of the Multi-Generational Family Household - Pew Research Center Publications
Rodney Harrell, PhD, Enid Kassner, and Carlos Figueiredo, PhD, "Multigenerational Households Are Increasing" - AARP Public Policy Institute