Thanks to those people who emailed me questions. In this article, I will answer some of your questions related specifically related to dependents. I slightly modified your questions to make this article more readable.
Q-1: What are the tax implications to my ability to claim my unmarried spouse as a dependent?
A-1: If your unmarried spouse qualifies as a dependent ( see A-2 below for the qualification tests ) , you may be entitled to a $3,650 exemption. High income taxpayers usually benefit little from dependency exemptions because of phase-outs; however, this high-income phase out has been eliminated for 2010.
If you are claiming the dependency exemption, your unmarried spouse cannot claim a personal exemption. The personal exemption is not elective for the dependent: if the unmarried spouse qualifies as a dependent by someone else, then he or she is not entitled to the personal exemption for themselves.
Even if the dependent cannot claim the personal exemption, a dependent is entitled to a standard deduction. This standard deduction for 2010 is limited to the greater of ( 1 ) $950, or ( 2 ) earned income plus $300 ( not to exceed the regular standard deduction ) . These amounts are adjusted annually for inflation.
Q-2: My unmarried spouse did not earn much income in 2010. May I claim my unmarried spouse as a dependent?
A-2: Claiming your unrelated unmarried spouse ( unrelated through blood or adoption ) as a dependent requires meeting six different tests. Keep in mind the tests differ from the tests to claim a related individual as a dependent. This article does not discuss claiming a dependent exemption for a related individual.
Your unmarried spouse ( 1 ) cannot be married and file a joint return, ( 2 ) must be a citizen of the US or a resident alien of the US, Canada, or Mexico, and ( 3 ) must live with you.
In addition, your unmarried spouse must meet the following conditions: ( 4 ) have gross income not exceeding an indexed for inflation amount ( $3,650 in 2010 ) , and ( 5 ) receive more than 50% of their support from you.
Gross income generally excludes income exempt from income taxes. Hence, unemployment is included in gross income for amounts received during the year that exceeds $2,400. Social security is excluded to the extent it is not taxable to your unmarried spouse. Wages would be included. Gifts, inheritances, scholarships and loan proceeds generally are excluded from the gross income test.
The support test generally must be done on a calendar year basis. You determine whether you pay more than 50% of the fair rental value of lodging furnished; the costs of all items paid directly for the benefit of your unmarried spouse such as clothing, education, medical and dental care, gifts, transportation, church contributions, entertainment, and recreational activities; and a proportionate share of expenses in support of the whole household that cannot be directly attributable to one individual such as food. Certain expenses are excluded from the support test such as the dependent's payroll taxes withheld from wages, life insurance premiums and funeral expenses.
For purposes of the support tests, the cash receipts received by your unmarried spouse from income excluded from the gross income test may count against your 50% support. For instance, gifts and inheritances from others will be deemed provided by your unmarried spouse and not by you.
Finally, ( 6 ) the relationship must not violate local law. Condition ( 6 ) can be a problem in some locations. The landmark Supreme Court decision in Lawrence v Texas that struck down anti-sodomy laws did much to eliminate this hurdle.
Q-3: We meet all of the tests mentioned in A-2 above so my unmarried spouse qualifies as a dependent. May I file using the head of household status to receive the more beneficial income tax brackets and higher standard deduction?
A-3: No, an unmarried spouse generally cannot meet the special dependent definition for head of household. To qualify for head of household, an adult dependent generally needs to be a blood or adopted relative.
Q-4: I am employed at a company that pays the premiums for health insurance benefits for my dependents as well as me. May an individual where one unmarried spouse pays for more than 50% of the other's living expenses, exclude the value of the health insurance coverage for federal tax purposes?
A-4: The code permits not only one's own health insurance premiums to be excluded from federal income taxation, but also for dependents. You need to fill out the proper paperwork with your Human Resources Department at work so they properly exclude the premiums from their payroll reports and your W-2.
To qualify for this tax relief, the following conditions also must be met:
—The health insurance plan must permit the claiming of dependents as part of the health insurance plan.
—You must provide over ½ the support of your unmarried spouse. There is no gross income test like there is for claiming the dependency exemption. See A-2 for further information about the support tests.
Thomas H. Franklin holds a CPA and a masters of science in taxation degree from Northern Illinois University. His practice specializes in advising same sex and other unmarried couples on tax and other financial matters. He has spoken before the Illinois Society of Certified Public Accountants on same sex couple issues. As required under Circular 230, this written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
His website is www.thomashfranklin.com and his e-mail address is thomashfranklin@gmail.com .
