One reason: Despite all that's been written, few people seem to understand the convolutions of law and regulation that apply to dependents. Another reason: The regulations keep changing. But the most important reason is that these deductions give you big tax breaks.
According to Eli J. Warach, the chief tax expert at Prentice Hall, there are older provisions you must remember and new provisions you need to check before year-end. Once again there are bigger dependent deductions and changes affecting those deductions.
Basically, the area of most confusion is a two-part test for dependents deductions.
One: For 1989, the dependent must have less than $2,000 in gross income. (There are some exceptions.)
Two: There is also a ``support'' test - you must furnish more than half of the dependent's support. (Once more, there are some exceptions.)
The gross income test does not necessarily include all income. It does include all income subject to tax, without taking into consideration any deductions. But, tax-free income is not included: tax-exempt municipal bond interest or non-taxable income, such as Social Security benefits. But watch this: When such non-taxable income is used by the dependent for his or her support, it could kill your deduction under the ``more-than-half-support'' test.
One provision effective for 1989 that still comes as a surprise to many people permits you a deduction for a child who has unlimited income of his own if you supply more than half his support. That's because the tax law specifically exempts children under 19 from the income test. …