Dependent Brother - Stock Sales

[rbrown6]

Hello,

For tax year 2020, I claimed my brother as a dependent because I was providing more than half of his support.  In 2020, he was unemployed the entire year and thus did not file taxes.  However, we recently found out that he received a 1099 from Vanguard in 2020 which honestly flew under our radar at the time.  He received about 2k in dividend returns and about 20k in "Proceeds From Broker and Barter Exchange Transactions."  This was money we exchanged from one mutual fund to another.  In light of this, do I need to amend my 2020 return to take him off as a dependent?  Needless to say, he will be filing for 2020.

[AmyC]

No. You can always double check each year and go through this quick quiz, Whom May I Claim as a Dependent? If you do need to amend: 

Please:

• Save a copy of the original return before doing an amended return.
• See how to file an amended return.
• Follow your amend at track an amended return 
• See Can I e-file my amended state return?

The IRS says in 2021 Publication 501 - Internal Revenue Service

Earned income includes salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants. Gross income is the total of your unearned and earned income. If your gross income was $4,300 or more, you usually can't be claimed as a dependent unless you are a qualifying child.

[rbrown6]

It looks like what this boils down to is whatever the definition of "gross income" is.  As far as taxable income goes, my brother made below $4,300.  However, he received a non-taxable settlement in 2020 and I'm not certain whether to count it as gross income.  What do you think?

[AmyC]

Right, The 20k knocks him out and you will need to amend. Please follow the instructions above. You will want to pay sooner than later as they will bill you  for interest once you have paid. If you need to set up a payment plan, go to Payments

The IRS says in 2021 Publication 501 - Internal Revenue Service

Earned income includes salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants. Gross income is the total of your unearned and earned income. If your gross income was $4,300 or more, you usually can't be claimed as a dependent unless you are a qualifying child.

[rbrown6]

One point of clarification - I took a more careful look at the 1099.  He sold 20k, but there was only a 41 dollar gain plus 2.1k in dividends. So I'm thinking he is actually under the 4,300 gross. What I'm trying to figure out how is how exactly they define gross income. Based on my new discovery of the 1099, would his gross income fall under 4,300? And should I count the proceeds from his settlement (definitely non-taxable) as part of his gross?

[AmyC]

Unfortunately, the gain is not what is looked at. The gross distribution was large. He did not have to reinvest the money, he could have kept it. The IRS says:  Gross income is the total of your unearned and earned income. The 1099-B represents passive income - he did not work for it- not earned, but it is still income.

[rbrown6]

Thank you!  In that case, I will file the amendment.

[Mike9241]

you can claim him as a qualifying child if all these tests are met
• he has the same principal abode as you for more than ½ the tax year. Temporary absences like for school are ignored
• if he is not a full-time student, he's under 19 at the end of the tax year. If a full-time student, he's under 24 at the end of the tax year.
• he hasn't provided over ½ his own support
• he didn't file a joint return unless there was no tax liability but merely filing jointly to facilitate refund of taxes withheld or estimates paid

or you can claim him as a qualifying relative if all these tests are met
• his gross income for 2020 is less than $4,300
• you provided over ½ his support
• he isn't a qualifying child of another taxpayer

so what is gross income?

Gross income means all income you received in the form of money, goods, 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 any expenses.

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.

Gross income includes gains, but not losses, reported on Form 8949 or Schedule D.