Choice "C" is correct. Janet and Ted are entitled to dependency exemptions for themselves, their two children and Aunt Martha. Aunt Martha is a "qualified relative." The qualifications to take an exemption for a qualifying relative are found in the "SUPORT" mnemonic.
Support (over 50%) test |
Under a specific amount of (taxable) gross income test |
Precludes dependent filing a joint tax return test |
Only citizens (residents of US/Canada or Mexico) test |
Relative test OR |
Taxpayer lives with individual for whole year test |
The two children meet the test for a qualifying child. In addition, Aunt Martha, a relative, qualifies because she does not have any taxable income (social security is not taxed at this low level of income), is not filing a joint tax return with another, is a citizen of the US, and is a qualifying relative. In this instance, note that Martha would not have to reside with the family. Only nonrelative members of a household must reside with the taxpayer for the entire year in order for the taxpayer to be entitled to a dependency exemption for that individual.Choices "a", "b", and "d" are incorrect per the above explanation.
