An early tax question

[brianl]

I know this is going out there early, but I'm hoping that some of the CPA's floating around might be able to offer some advice on this.

In 12/08, my in-laws moved in with my wife and I. Due to their age and financial situation, things just made more sense for them to be with us. They are both in their 80's.

My father in law has not "paid" taxes for years and lives off of social security and a small annuity from his years as a Minister. He has said that I could claim him and my mother in law as dependents if I chose to do so.

I have looked and have seen that if he earns more than the personal exemption amount you can't claim someone.

I guess my simple question is, does "individual amount" double if I'm considering both. Combined 3500 * 2 they won't meet the crtieria, but he himself will.

If anyone knows of a publication that I can reference or has some advice I'm all ears. I just want to do what is fair and right.

Thanks in advance to the DBR nation for the help.

[Jim3k]

Reading last year's Pub. 17, the IRS seems to say that social security payments are exempt from the $3500 limit. See p. 31: "Tax exempt income, such as certain social security benefits, is not included as gross income."

At p. 80, in general SS benefits are not taxable.

His annuity is probably taxable the same as any retirement plan. Depending on how much he's getting from the annuity he might be exceeding the $3500 limit. But if it's joint, then I think you can halve it. (If he dies first, but the payments continue for her, I think you can safely assume it is joint. Also true if they are from a community property state.)

Don't be afraid to confirm this with the IRS (800-829-1040). An alternative is the AARP TaxAide program (to find a site, call 888-227-7669). It's part of the IRS' volunteer tax assistance program.