relative sells home for $200,000 but is still qualifying relative.

[fanfare]

Is ChatGPT correct?

ChatGPT says:

"To determine whether a person qualifies as a dependent on someone else's tax return, there are different sets of rules based on whether the person is being considered a qualifying child or a qualifying relative.

In the context of a **qualifying relative**, one of the requirements is that the person must have gross income of less than $4,700 (for 2023). To meet this test, the potential dependent’s gross income must be below this threshold.

**Gross income** includes all income that is not explicitly exempt from taxation. However, the exclusion for gain on the sale of a principal residence is explicitly exempt from gross income under Section 121 of the Internal Revenue Code. Therefore, if the $200,000 gain is excluded under Section 121, it would not be included in the dependent's gross income calculation.

In other words, if the taxpayer has an excluded capital gain of $200,000 from the sale of their principal residence, this amount would not count as part of their gross income for the purposes of determining whether they qualify as a dependent. Thus, they would still have to have gross income from other sources above $4,700 to be disqualified as a dependent based on gross income alone."

[xmasbaby0]

A relative who had $200K for selling a home does not qualify as your dependent.   It is INCOME---not whether it was excluded from capital gains tax --that counts.  You cannot claim them.

[fanfare]

Well, that's one quick NO vote !

[xmasbaby0]

IRS interview to help determine who can be claimed:

https://www.irs.gov/help/ita/who-can-i-claim-as-a-

WHO CAN I CLAIM AS A DEPENDENT?

You can claim a child, relative, friend, or fiancé (etc.) as a dependent on your 2023 taxes as long as they meet the following requirements:

Qualifying child

• They're related to you.
• They aren't claimed as a dependent by someone else.
• They're a U.S. citizen, resident alien, national, or a Canadian or Mexican resident.
• They aren’t filing a joint return with their spouse.
• They're under the age of 19 (or 24 for full-time students).
• No age limit for permanently and totally disabled children.
• They lived with you for more than half the year (exceptions apply).
• They didn't provide more than half of their own support for the year.

Qualifying relative

• They don't have to be related to you (despite the name).
• They aren't claimed as a dependent by someone else.
• They're a U.S. citizen, resident alien, national, or a Canadian or Mexican resident.
• They aren’t filing a joint return with their spouse.
• They lived with you the entire year (exceptions apply).
• They made less than $4,700 in 2023.  (Not counting Social Security)
• You provided more than half of their financial support.

When you add someone as a dependent, we'll ask a series of questions to make sure you can claim them. There may be other tax benefits you can get when you claim a dependent.

Related Information:

• What does "financially support another person" mean?

[fanfare]

Does tax-free municipal bond interest count as "gross Income" for dependency test?

ChatGPT:

"No, tax-free municipal bond interest does not count as "gross income" for the purpose of the dependency test. According to the IRS, tax-exempt income such as interest from municipal bonds is excluded from gross income when determining if a person qualifies as a dependent."

[fanfare]

"WHO CAN I CLAIM AS A DEPENDENT?"

Got that @xmasbaby0 

the gist of this thread is with regard to $4,700 of gross income, all else being satisfied.

[xmasbaby0]

I would urge the user to use the IRS tool to determine whether they can claim a dependent instead of using an AI chat app. 

[rjs]

---

@fanfare wrote:

Does tax-free municipal bond interest count as "gross Income" for dependency test?

ChatGPT:

"No, tax-free municipal bond interest does not count as "gross income" for the purpose of the dependency test. According to the IRS, tax-exempt income such as interest from municipal bonds is excluded from gross income when determining if a person qualifies as a dependent."

---

I think ChatGPT is right about municipal bond interest, but "According to the IRS" is not a meaningful citation. Where exactly does the IRS say that?

You have to be very careful with these AI systems. It's well known that they sometimes make things up or make mistakes.

I don't know what the right answer is about the home sale exclusion. I'm waiting to see if anyone posts a specific authoritative reference. It might hinge on whether "excluded" is the same as "exempt."

[Opus 17]

Gross income is all income that isn't exempt from tax.  While muni bond interest may be exempt from tax, the capital gains on the sale of a personal home is not exempt, it is conditionally excluded, and there's a difference.  Muni bond interest is tax exempt no matter your other circumstances.  The capital gains on sale of a home is only excluded if you meet the conditions of the exclusion. 

Gross Income Test

To meet this test, a person's gross income for the year must be less than $4,700.

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.

[fanfare]

IRS refers to the gain to be excluded as "ineligible capital gains".

How is that not the same as "exempt" ?.

If the home was a rental property for the last five years, the question would not arise.

[fanfare]

 "they sometimes make things up"

The thing is, every word that comes out of ChatGPT is made up, based on the previous word.

----

The statement above about various type of income does not say anything about Capital Gains.

That's the way the billionaires want it.

[Opus 17]

So my interpretation of exempt vs. excluded is not correct.  Section 121 says in plain language,

Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.

https://www.law.cornell.edu/uscode/text/26/121

Separately, of course, we could wonder how a taxpayer could pay "more than half" of a person's financial support when that person has a substantial capital gain from a property and no other income (or why you would want to support your freeloading relative who is sitting on a fat stack)  But that's an audit issue.  Under the code, it appears that if a person has less than $4700 of gross income, and has less than $250,000 of qualifying gains under section 121 that they do not use for their support (maybe they invest it in a non-income generating account, or use it for someone else's support), and you pay more than half their living expenses, they qualify to be claimed by you as a dependent.

[fanfare]

a major cost of support is shelter.

The cost of shelter is the fair market rental income expected from the home in which the household resides.

If the dependent has sold their home and resides with taxpayer, then the dependent's share of cost of shelter is zero.

[Hal_Al]

I found where the IRS says that the excluded gain must be included in gross income in determining whether a person has to file a tax return.  But, have yet to find a similar statement vis a vis the dependent income test.

Reference: Pub 501 (filing requirement)"Gross income means all income you receive in the form of money, goods, property, and services that isn't exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it)."

Table 1 notes, page 2. https://www.irs.gov/pub/irs-pdf/p501.pdf