Most people’s minds automatically go to a child who lives in the household when they consider who to declare as a dependent on their tax return. The personal exemption provision of the Internal Revenue Code (IRC) has traditionally enabled taxpayers to deduct certain living expenses, such as those for themselves and their dependents.
Unfortunately, beginning with tax returns for 2018, personal exemptions have been repealed due to the Tax Cuts and Jobs Act of 2017.
The good news is that dependents can still reduce your taxable income. The standards for claiming a dependant and the tax benefits that remain for those who qualify are detailed below.
Why Are They Your Approved Dependents?
A qualified child or qualifying relative is someone who meets certain criteria in order for you to claim them as a dependent.
Child Who Is Eligible
An “eligible child” is a youngster who meets all four of the following criteria set forth by the Internal Revenue Service.
1. Relationship
The term “kid” has a broad meaning in the eyes of the Internal Revenue Service. Any person who shares a common ancestor with a son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or any descendant of these is considered a member of the extended family.
2. Age
The age of the dependent is only acceptable if the individual meets one of the following conditions:
- Be under age 19 at the end of the tax year and younger than you or your spouse if you’re filing jointly
- Be under age 24 at the end of the tax year, a student, and younger than you or your spouse if filing jointly
- Be permanently and totally disabled regardless of age
3. Residency
A child must have been a full-time member of your household for the previous year in order to be eligible for this benefit. Even if your kids are away from home for a little while (at summer camp, on a school trip, etc.), they are still regarded to be living with you.
It is assumed that a child who was born and passed away in the same year was a permanent resident of your home. Divorced/separated/parents who do not live together kids get special treatment. The child is regarded to have resided with the custodial parent in these situations.
But if all four of the following are true, the child can be considered a qualified child of the non-custodial parent:
- The parents
- Separated or divorced with a decree of separation or divorce.
- Have legally divorced with a separation agreement.
- Stayed completely apart for the final half of the year.
- Moreover, half of the child’s needs were met by their parents.
- The child was in the custody of one or both parents for more than half the year.
- Either of the following statements is true
- Form 8332 must be used for this purpose, and the non-custodial parent’s return must include a signed certification from the custodial parent stating they will not be claiming the child as a dependent.
- Non-custodial parents can claim their children as dependents if the agreement between them indicates that they can do so in a divorce decree, separate maintenance agreement, or written separation agreement that was finalized before 1985. Neither party’s agreement prohibits the other from claiming the kid can have been modified after 1984, and the non-custodial parent must have contributed at least $600 toward the child’s maintenance during the year.
The non-custodial parent can claim the child as a dependent and get the Child Tax Credit if the following four conditions are met. But the non-custodial parent will not be eligible for head of the household status, the Child and Dependent Care Credit, or the Earned Income Tax Credit if this is the case.
4. Support
A potential dependent child cannot have contributed more than half of their own support toward their own upkeep during the year before applying for dependency status.
If, for instance, you contributed $6,000 toward your son’s upkeep, but he also worked part-time and contributed $8,000, he would not qualify as your child since he would be responsible for more than half of his own support. The criteria for legitimacy of backing are unclear.
These expenses may include any of the following options:
- Food, clothing, and recreation
- School tuition
- The medical and dental insurance and costs of care
- Lodging
- Furniture, appliances, and cars
- Transportation
- Other necessities
There is a worksheet in IRS Publication 501 to assist you to figure out if you pass the support test. Sometimes a child will qualify under more than one person’s age, relationship, residency, and support categories. Only one parent can claim the kid as a dependent unless they file a joint return.
It’s a good thing the IRS has tiebreaker rules to assist you to figure things out:
- To qualify as a qualified child of a parent, a child needs only one parent.
- According to IRS rules, a child is considered a qualifying dependant of the parent with whom he or she spent the most time throughout the year if the time spent with each parent was not equal.
- The IRS will consider the child to be a qualified child of the parent with the larger adjusted gross income (AGI) for the year even if the child spent roughly the same amount of time with each parent during the year.
To assist you to figure out who is eligible to claim a child as a dependant, the IRS gives various instances in Publication 501.
Eligible Relative
The following criteria must be met for a relative to qualify, even if they are not a qualifying child:
1. Not an Eligible Child
If you or someone else has a child who meets the requirements, that child does not count as a qualifying relative.
2. Family Member or Relationship
That person must be either a relative or someone who lives with you year-round. If you were married to this individual at any point in the year, they do not qualify as a relative.
You don’t have to keep somebody who is linked to you in any of the following ways as a permanent resident of your home for the entire year:
- Your child (biological or adopted child), stepchild, foster child, or a descendant of any of these
- Your brother, sister, half-brother, half-sister, stepbrother, or stepsister
- Your father, mother, grandparent, or another direct ancestor
- Your stepfather or stepmother (foster parents don’t qualify)
- Your niece or nephew
- A son or daughter of your half-brother or half-sister
- Your aunt or uncle
- Your in-law’s son, daughter, brother, sister, father, or mother
The death or dissolution of any of these marriage-based partnerships is irrelevant. Keep in mind that a cousin does not qualify. To count as a qualifying relative, a cousin would have to share your home with you for at least a year.
There is no requirement that the supported individual is connected to either you or your spouse if you submit a joint return.
3. Test of Gross Income
In 2020, the potential qualifying relative’s gross income must be less than $4,300 in order to achieve this requirement. Gross income is the sum of all sources of income cash, property, and services that are subject to taxation, as defined by the Internal Revenue Service.
Included in this category are taxable unemployment compensation, taxable scholarship funds, taxable rental income, taxable partnership revenue, and taxable net income from a business after deducting the cost of items sold.
In this context, gross income does not include tax-exempt income like government help for the poor or benefits for military veterans.
4. Support Test
The relative in question must have relied on you for more than half of their financial support in order to pass this requirement. Look at how much money the person received in total from all sources and how much you gave them.
To clarify, this includes any money they put in of their own but excludes any of their own money that wasn’t used on providing aid. To illustrate, suppose your mom has $2,700 in income after factoring in $2,400 from an IRA distribution and $300 from interest.
There was a $2,000 hotel bill, $400 in entertainment expenses, and $300 saved. She put $300 away in savings instead of spending it on her own living expenses this year, bringing her total self-support contribution to $2,400. A contribution of more than $2,400 is sufficient to demonstrate support.
In some cases, such as when an aging parent needs help, multiple people, such as two or more adult children, pitch in to make ends meet. If more than ten percent of the support comes from a group of people, those people can agree to take turns claiming the person as a qualified relative in subsequent years.
Rules for General Dependency
Having established if your dependent meets the definition of a qualifying child or qualifying family, there are a few restrictions you should be aware of that apply to everyone.
To begin, you cannot claim any dependents as your own under U.S. tax law if you are a dependent of another taxpayer. Let’s say 18-year-old Mary has a kid named Tim, and the two of them are now residing with Mary’s dad, Josh.
Josh has a steady job and pays for the entire year’s worth of food, utilities, and entertainment on his own. As a result of Mary’s part-time employment, she was able to save $2,500.00. Mary and Tim both rely on Josh for support in this scenario.
Mary is a dependent of her father, so she cannot claim Tim as a dependent on her tax return, even if she has income and is entitled to a refund of federal withholding. Two, the person you claim as a dependent must be a citizen, permanent resident, or national of the United States, Canada, or Mexico.
At last, if you and your spouse are filing a joint return, neither of you can claim the other as a dependent unless you are filing solely to get a refund of income taxes you already paid.
Therefore, in the aforementioned scenario, Mary would still be considered Josh’s dependent even if she was married to Dan, a full-time student and non-worker, and the two of them filed a joint tax return solely to get Mary’s refund of federal income tax withheld.
Possibilities of Declaring a Dependent
Although the TCJA did away with personal exemptions, declaring dependents still has some tax advantages.
They consist of:
- Credit for Child Tax. This can be used for up to three children and is worth up to $2,000 per child until the child becomes 17 years old.
- Credit for care for dependent children. Unless the child is disabled, in which case there is no age restriction, this is provided until the youngster becomes 13 years old.
- Credit for Earned Income (EITC). This is accessible as long as the youngster is enrolled in school and under the age of 19 or 24.
- Credits for education. These include the Lifetime Learning Credit and the American Opportunity Tax Credit.
- Other Dependents Credit. Dependents who are not eligible for the Child Tax Credit may use this. Up to $500 can be claimed for each eligible dependent.
Private Exemptions
Before the TCJA, filers may take a tax break for themselves and any dependents they claimed. Each personal exemption was worth $4,050 in 2017, the final year that such deductions were allowed.
In addition to the standard deduction and itemized deductions, a married couple with two dependent children is eligible for four exemptions, or $16,200, to reduce their adjusted gross income.
With the implementation of the TCJA on January 1, 2018, the ability to claim personal exemptions was taken away. However, taxpayers who have a large number of young dependents have some hope that personal exemptions may be reinstated.
The elimination of personal exemptions is just one of many TCJA provisions that will be phased out at the end of 2025. They could return if Congress fails to either extend the TCJA or approves a new tax reform measure that changes the status of personal exemptions.
Bottom Line
Claiming a dependant can be worth several thousand dollars even without the personal exemption.
In addition, some of the tax credits for taxpayers with dependents are refundable, meaning that in addition to reducing the amount of tax you owe, they can also raise your refund. Please refer to our comprehensive tax guide for further assistance.
