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One can claim a “qualifying relative” exemption for any person who meets certain tests. Although the person is often a relative by blood or marriage, the IRS allows you to claim other, unrelated members of your household -- if they meet certain tests. The first test to be a qualifying relative is that the person cannot be a qualifying child to you or any other taxpayer. For instance, if you had a minor child who lived with your parents and meets all the tests to be their qualifying child, you cannot claim the child as a qualifying relative even if your parents didn’t claim your child on their taxes.
The support test is different for a qualifying relative and qualifying child. For a qualifying relative exemption, your share of the total support for that person must exceed 50 percent. With the qualifying child support test, the child’s share of his or her total support must be less than 50 percent. It’s a subtle but significant difference. If no one person provides 50 percent of the total support for a qualifying relative, the two or more persons who would be able to claim a qualifying relative exemption except for the support test decide among themselves which one gets the exemption. The others must sign a statement agreeing not to claim the exemption. The person claiming the exemption must attach to his tax return Form 2120 identifying the people who agreed not to claim the exemption.
The uncle would have needed to provide more than 50% of the support of your srep-daughter to claim her. The deduction will probably be much more helpful to him, especially if he did actually provide the support but if it was just a place to stay and you as the parents provided support (you could actually take the deduction still). The deduction will probably be wasted on you step-daughter with only $500 in income, but it is ultimately up to her.
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