Tax Breaks for Helping a Struggling Relative

These days, the odds of having a relative that is struggling with debt or out of work are unfortunately pretty high. But if you can afford to help one of those relatives out financially, you may be entitled to some tax breaks that help you out.

Here's the first of a two-part series on how you can extend some generosity to family members and get a little something back from Uncle Sam for doing so.

The most obvious break is if you're able to claim a relative as your tax-return dependent. By doing so, you can bag a personal exemption deduction, which for 2009 is $3,650. Here are the requirements you have to meet to collect the write-off.

Support Requirement

You must provide over half the relative’s support. If the person lives in your household for free, count his or her share of the rental value of your home as support (use the rental value even if you own), as well as his or her share of total household expenses for food, utilities, and so forth. Figure the relative’s share of these indirect costs by dividing them by the number of people in your household. Then add any amounts you spend on direct support -- such as covering the relative’s health-insurance premiums or car payments. Calculating support can be tricky. For full details and a handy worksheet, see IRS Publication 501 (Exemptions, Standard Deduction, and Filing Information) at IRS.gov .

The supported person doesn't have to live in your household if he or she is your child; a descendant of your child (such as a grandkid); a brother, stepbrother, half-brother, sister, stepsister, half-sister, or a descendent of one of these individuals (such as a niece or nephew); or your son-in-law, daughter-in-law, father, stepfather, father-in-law, mother, stepmother, mother-in-law, brother-in-law, sister-in-law, aunt or uncle. If you’re supporting someone who doesn’t fit into any of those categories, that person can’t be your dependent unless his or her main residence is your household. So, even though you provide 100% support for a godchild, he or she can’t be your dependent unless you share the same household.

Gross Income Requirement

The supported relative’s 2009 gross income must be under $3,650 for you to claim a personal exemption deduction for that person on your 2009 Form 1040. Helpfully, gross income doesn’t include the first $2,400 of 2009 unemployment benefits, and it doesn’t include tax-free Social Security benefits.

Note: If the relative in question is your under-age-19 child, the gross income requirement doesn’t apply. Ditto for your under-age-24 child who is a full-time student. In other words, a supported child who fits one of these descriptions can be your dependent regardless of his or her gross income.

No Joint Return Requirement

The supported person cannot file a joint Form 1040 with his or her spouse unless the return was only filed to collect a tax refund and neither spouse would have owed tax if they had filed separate returns.

Citizen or Resident Requirement

The supported person must be a U.S. citizen, a U.S. resident alien, a U.S. national or a resident of Canada or Mexico.

Say you have a relative who would qualify as your dependent under the preceding rules except for one thing: You don’t provide over half of his or her support. Instead, you and one or more other sainted individuals together provide over half of the support. This is a relatively common scenario with an aged parent or disabled adult sibling. But it could also happen with just about any out-of-work relative these days. Thankfully, you may be able to claim the $3,650 personal exemption deduction in this situation under the so-called multiple support agreement rules. Here are the requirements you must meet.

Example: This year, you and your sister each pay about one-third of the support for your 25-year-old nephew who is out of work for the entire year and has less than $3,650 of gross income. The nephew would qualify as your dependent except for the fact that you personally don’t pay over half his support. But together, you and your sister do. You and your sister flip a coin to see who can claim the $3,650 dependent exemption deduction for your nephew, and you win. Next April, you file your 2009 Form 1040 with Form 2120 attached. Done! If the same scenario occurs in 2010, your sister can take her turn claiming the deduction for your nephew.

The rules allowing dependent exemption deductions for supported relatives have been around for many years, but you might not have needed to know them before now. Keep them in mind at tax filing time.

In next week's column, I'll cover some other tax breaks for supporting relatives, like being able to deduct medical expenses you pay for them or being able to use favorable head-of-household filing status if you're unmarried.