Originally Answered: I am submitting my tax return (late). Must I report income from my parents (my only income)? If so, how?
Some of this advice is sound, but as a lawyer, let me qualify it. To clarify, as suggested above you are not too old to be a dependent if you are a family member you have less than $3300 in income AND your parents are providing MORE THAN HALF of your support. It is important that you understand all of these conditions: If you have no income but are living on your savings, or other monies previously given to you (e.g., inheritance) or from another source (e.g., alimony), you were NOT a dependent. But if you meet the above definition according to all criteria, you WERE a dependent, and the case for you is closed. Your parents were (or are, if they did not take it) entitled to a deduction on their tax returns.
Just because they gave you money does not mean it is "income." It can be, by law, a "gift" or "support," and that brings different consequences for them, not you. Keep in mind that income has a very specific definition, one created by law. It is not "wrong" to report no income if you had none, that is, if you "earned" no money or received no profits or return on investments or sales.
But here's where it gets messy. If you were NOT a dependent for the reasons I said above, money given to you would be considered a gift (money or property given to anyone, including relatives, who are not dependents). And if your parents did NOT claim you as a dependent, when estate taxes come if there ever were an audit, they or their heirs might have some explaining to do as to what the money given to you was at the time.
By law, the IRC taxes the GIVER of gifts, not the recipients, (because gifts and estates could be used to divert and shelter income, or to discourage work through giving gifts). Certain gifts (prizes and awards from lotteries and contests) or bonuses from employers are swept into the definition of income, but not gifts in general. The tax instructions make this clear.
Therefore, it is your PARENTS who should be monitoring and reporting how much money they are giving you, much as a grantor on a trust reports expenses paid from the trust as a trust and estate tax. The IRC has a limit in 2006 of $12,000 a year that can be given to you as a gift. For "loans" with "no interest" (money you expect to pay back), the IRS classifies such loans as below-market loans, and, depending on the amount, your parents may have to pay foregone interest as income they otherwise would have earned but are sheltering in the forms of gifts to you.
The IRS has many publications on this, specifically Publication 950 for gifts. Go to IRS.gov to retrieve it.
The bottom line is that if you were a dependent in 2006, the money to you was not a "gift" and you should accept that you were their dependent, and technically they could adjust their taxes accordingly (and arguably should for recordkeeping purposes). But if you TRULY had no income BUT you were living on other funds for half or more of your expenses, you were NOT their dependent and that money was a gift.
Hope that makes sense.