Only the taxable portion of social security benefits count towards the $4,300.00 dependent income limit.
From IRS publication 501:
Qualifying Relative
Four tests must be met for a person to be your qualifying relative. The four tests are:
Not a qualifying child test,
Member of household or relationship,
Gross income test, and
Support test.
Gross Income Test
To meet this test, a person's gross income for the year must be less than $4,300.
Gross income defined.
Gross income is all income in the form of money, property, and services that isn't exempt from tax.
In a manufacturing, merchandising, or mining business, gross income is the total net sales minus the cost of goods sold, plus any miscellaneous income from the business.
Gross receipts from rental property are gross income. Don't deduct taxes, repairs, or other expenses to determine the gross income from rental property.
Gross income includes a partner's share of the gross (not net) partnership income.
Gross income also includes all taxable unemployment compensation, taxable social security benefits, and certain amounts received as scholarship and fellowship grants. Scholarships received by degree candidates and used for tuition, fees, supplies, books, and equipment required for particular courses aren’t generally included in gross income. For more information about scholarships, see chapter 1 of Pub. 970.
