Claiming Dependents: Does Muni Income Count Toward Gross Income Test for Qualifying Relatives?

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andy658
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Claiming Dependents: Does Muni Income Count Toward Gross Income Test for Qualifying Relatives?

Post by andy658 »

This question concerns whether income from a municipal bond fund or municipal money market fund can disqualify an otherwise "qualifying relative" from being claimed as a dependent on another person's US federal tax return.

As described in IRS Publication 501, a person must meet four tests to be your "qualifying relative." One of these is the "Gross Income Test," which states that the person's gross income must be less than a specified threshold. Gross income is defined as "all income in the form of money, property, and services THAT ISN'T EXEMPT FROM TAX." (emphasis mine)

As income from a municipal bond/MM fund is exempt from federal taxes, I assume it does NOT count as "gross income" in this context, and therefore CANNOT cause a person to violate the "Gross Income Test," no matter how much how much income the person receives in this way. Thus, a person can hypothetically earn unlimited amounts of income from municipal bond/MM funds and still be a "qualifying relative," as long as the person otherwise meets the four tests. Is this correct?

In other words, can income from municipal bond funds or municipal money market funds cause an otherwise "qualifying relative" to violate the applicable income threshold, thereby disqualifying that person from being claimed as a dependent on another person's US federal tax return?
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FiveK
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Re: Claiming Dependents: Does Muni Income Count Toward Gross Income Test for Qualifying Relatives?

Post by FiveK »

You are reading the gross income test correctly.

The part about "...hypothetically earn unlimited amounts of income from municipal bond/MM funds and still be a qualifying relative," however, might run into a snag when it comes to the support test. There (see Worksheet for Determining Support) both taxable and nontaxable income is considered. Then it depends on what is done with the income....
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andy658
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Re: Claiming Dependents: Does Muni Income Count Toward Gross Income Test for Qualifying Relatives?

Post by andy658 »

FiveK wrote: Fri Jan 27, 2023 2:51 pm You are reading the gross income test correctly.

The part about "...hypothetically earn unlimited amounts of income from municipal bond/MM funds and still be a qualifying relative," however, might run into a snag when it comes to the support test. There (see Worksheet for Determining Support) both taxable and nontaxable income is considered. Then it depends on what is done with the income....
Thanks for responding and confirming that my reading of the gross income test is correct.

If anyone has any additional thoughts to add to this, or can corroborate the opinions expressed heretofore, please feel free to chime in.
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Klewles
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Re: Claiming Dependents: Does Muni Income Count Toward Gross Income Test for Qualifying Relatives?

Post by Klewles »

andy658 wrote: Wed Feb 08, 2023 5:21 pm
FiveK wrote: Fri Jan 27, 2023 2:51 pm You are reading the gross income test correctly.

The part about "...hypothetically earn unlimited amounts of income from municipal bond/MM funds and still be a qualifying relative," however, might run into a snag when it comes to the support test. There (see Worksheet for Determining Support) both taxable and nontaxable income is considered. Then it depends on what is done with the income....
Thanks for responding and confirming that my reading of the gross income test is correct.

If anyone has any additional thoughts to add to this, or can corroborate the opinions expressed heretofore, please feel free to chime in.
FiveK's explanation of gross income test is corroborated by Pub 4012, page C-4, footnote 3: Gross income means all income the person received in the form of money, goods, property and services, that isn’t exempt from tax.

FiveK's explanation of support test is corroborated by the cited Worksheet for Determining Support, line 1: Enter the total funds belonging to the person you supported, including income received (taxable and nontaxable).
Topic Author
andy658
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Re: Claiming Dependents: Does Muni Income Count Toward Gross Income Test for Qualifying Relatives?

Post by andy658 »

Klewles wrote: Fri Feb 10, 2023 4:06 am
andy658 wrote: Wed Feb 08, 2023 5:21 pm
FiveK wrote: Fri Jan 27, 2023 2:51 pm You are reading the gross income test correctly.

The part about "...hypothetically earn unlimited amounts of income from municipal bond/MM funds and still be a qualifying relative," however, might run into a snag when it comes to the support test. There (see Worksheet for Determining Support) both taxable and nontaxable income is considered. Then it depends on what is done with the income....
Thanks for responding and confirming that my reading of the gross income test is correct.

If anyone has any additional thoughts to add to this, or can corroborate the opinions expressed heretofore, please feel free to chime in.
FiveK's explanation of gross income test is corroborated by Pub 4012, page C-4, footnote 3: Gross income means all income the person received in the form of money, goods, property and services, that isn’t exempt from tax.

FiveK's explanation of support test is corroborated by the cited Worksheet for Determining Support, line 1: Enter the total funds belonging to the person you supported, including income received (taxable and nontaxable).
Thanks to both respondents.
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