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Yes - a mother-in-law be claimed as a dependent.
You cannot claim a married person who files a joint return as a dependent unless that joint return is only a claim for refund and there would be no tax liability for either spouse on separate returns. - so generally - the mother-in-law should not file a joint tax return with her spouse.
Tests To Be a Qualifying Relative:
-- The person cannot be your qualifying child or the qualifying child of any other taxpayer.
-- The person either (a) must be related to you, or (b) must live with you all year as a member of your household. - please be aware that your mother-in-law is not required to live with you.
-- The person's gross income for the year must be less than $3,650 (for 2010) - please verify.
-- You must provide more than half of the person's total support for the year - please verify.
Please see for reference - IRS publication 501, page 12 - www.irs.gov/pub/irs-pdf/p501.pdf
Let me know if you need any help or clarification.
The gift is not a taxable income in the US - please see for reference the IRS publication 525 page 34 - http://www.irs.gov/pub/irs-pdf/p525.pdf
Recipients of gifts should not include the value of gifts into their taxable income and do not report on their tax returns - regardless of the value of gifts.
Social security benefits might be partly taxable. However if social security benefits is the only income - none is taxable.
Let me know if you need any help.