Could someone please clarify exactly what "the joint return is only a claim for refund and no tax liability would exist for either spouse on separate returns" means. My daughter did file a claim for a refund because she over paid taxes but yet she made enough to have "tax liability". The same is true for her husband. Does it mean that income can't be more than $3650? Thank you!

Are you asking about the rules for claiming your daughter as your dependent? I assume she has already filed jointly with her husband, right? What it's saying is that you can not claim her as your dependent UNLESS it is true that if they had filed separately neither your daughter nor her husband would have had any federal tax bill at all. It's not asking about whether they had a refund, but rather whether line 60 of Form 1040 for each of the separate returns would have been $0. It sounds like this is not the case, since you say that both your daughter and her husband had tax liability (although they got a refund).

In addition, your daughter must have income less than $3650. This is a separate issue, as there are people who make less than $3650 who have tax liabaility, and people who make more that do not. Finally, you must have provided at least half her support in order to claim her as your dependent.