Tax Tips: Personal exemptions and deductions

January 6, 2006

Your practice provides a wealth of write-offs. Read this to make sure you get every single one.

This is the first in a six-part series leading up to tax time. In each article, you'll find advice from an experienced CPA on how to work the tax code to your advantage to trim your tax bill come April 17.

When it comes to personal exemptions and deductions, I find that one of the biggest areas of confusion for my physician clients is dependency deductions. Questions like "Can I take deductions for my children who are in college?" or, "I'm supporting my elderly parents; can I claim them as dependents?" come up all the time. While the rules can be complex, the guidelines below will point you in the right direction to ensure you don't miss out on any deductions you're entitled to.

The basics

In some cases it's easy to figure out-your 4-year-old whom you support and who lives with you is your dependent. But what about your grandchild who lives with you? Or what about your live-in fiancee who left work to go back to school full time?

Before we get into the tricky stuff, here's a quick review of the rules on children: To qualify for a dependency deduction, your child must be younger than 19, live with you for more than half the year, and can't provide more than half of his own support. If the child is a student, the age limit is extended to 24 and she can either live with you or away at school. There's no age cut-off for a child who's permanently and totally disabled.

You might have a "qualifying relative" who's your dependent, too. Your mother, father, ancestors of either, siblings, stepbrothers, stepsisters, step-parents, in-laws, aunts, uncles, grandchildren, nieces, and nephews could qualify. Or someone who's not related to you could be your dependent, as well, if he lived with you for the entire year as a member of your household. In either case, the dependent's gross income must be less than $3,200, and you must have provided more than half of her support. In addition, the dependent can't file a joint return with a spouse (except where neither spouse is required to file, but they file a joint return to claim a refund).

Say, for instance, that you provided more than half the money needed to support your widowed aunt last year. Her income was less than $3,200, and she lives in a nursing home. You can claim a dependency deduction for her even though she doesn't live in your home, because she's a "qualifying relative."

Or, say your companion moved into your co-op and lived with you for the entire year. You also provided more than half his support because he had no income. You can claim him as a dependent, as well, as long as the relationship doesn't violate local law.

You might be able to get even more tax breaks from your dependents, if you pay someone to look after them so you can work. There's a tax credit that's available for a dependent child under 13 or for a spouse or dependent of any age who's physically or mentally unable to care for him- or herself who lived with you for more than half the year. The credit ranges from 20 to 35 percent of the amount you paid a caregiver (the higher your income, the lower the percentage you can claim). For 2005, the limit is $3,000 on expenses you can consider for one dependent, and $6,000 for two or more dependents.

New laws and rules