Final answer:
The incorrect statement regarding the rules for claiming dependents on a tax return is that the dependent must live with the taxpayer all year and have no income. There are requirements for residency and financial support, but dependents are not barred from having any income, and the year-round living requirement is not accurate.
Step-by-step explanation:
The statement that is NOT a rule when claiming dependents is that "The dependent must live with the taxpayer all year and have no income." While there are residency and support requirements, the dependent does not need to have no income, and there is no such all-year living requirement.
To clarify, dependents must meet certain criteria to be claimed on a tax return. These include:
- The dependent is not filing a joint return with a spouse unless the joint return is only to claim a refund.
- A resident of the U.S., Canada, or Mexico for some part of the year can be claimed as a dependent.
- A taxpayer who is a dependent of another taxpayer may not claim any dependents on their own tax return.
Regarding the residency and financial support criteria, a dependent generally must live with the taxpayer for more than half of the year, but there are exceptions, such as for students or relatives who do not live with the taxpayer. Also, while there are income limits for certain types of dependents, such as qualifying children, they do not prohibit the dependent from having any income whatsoever.