DEPENDENTS
Claiming dependents on an IRS tax return can significantly reduce a taxpayer's liability and increase their refund. The rules surrounding who qualifies as a dependent can be complex, involving criteria related to relationship, residency, income, and support. I want to address some of the more important aspects of claiming dependents, including eligibility requirements, benefits, and common issues taxpayers may encounter.
The Tax Cuts and Jobs Act passed in 2017 dramatically changed how dependents are treated on tax returns at the Federal level. Some states adopted the general treatment; California did not. Be sure to study your state's rules if ou are planning to claim a dependent on your state return.
A dependent is someone who relies on the taxpayer for financial support and meets certain criteria set by the IRS. There are two types of dependents: qualifying children and qualifying relatives. Each type has specific rules that must be met.
To claim a qualifying child as a dependent, the following tests must be satisfied:
Relationship Test: The child must be the taxpayer's son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals.
Age Test: The child must be under age 19 at the end of the year and younger than the taxpayer (or taxpayer's spouse if filing jointly), or under age 24 if a full-time student and younger than the taxpayer, or any age if permanently and totally disabled.
Residency Test: The child must have lived with the taxpayer for more than half of the year. There are exceptions for temporary absences, such as for school, vacation, or medical care.
Support Test: The child must not have provided more than half of their own support during the year.
Joint Return Test: The child cannot file a joint return for the year unless it is solely to claim a refund of withheld income tax or estimated tax paid.
To claim a qualifying relative as a dependent, the following tests must be satisfied:
Not a Qualifying Child Test: The individual cannot be a qualifying child of the taxpayer or any other taxpayer.
Relationship or Member of Household Test: The individual must either be related to the taxpayer in one of several specific ways or live with the taxpayer all year as a member of their household.
Gross Income Test: The individual's gross income for the year must be less than $4,400 (for 2023).
Support Test: The taxpayer must provide more than half of the individual's total support for the year.
Claiming dependents can provide several tax benefits, including:
Child Tax Credit: Taxpayers may be eligible for a credit of up to $2,000 per qualifying child under the age of 17. The credit is partially refundable, meaning taxpayers can receive up to $1,400 as a refund even if they owe no tax.
Credit for Other Dependents: Taxpayers can claim a non-refundable credit of up to $500 for each qualifying relative or child who does not meet the criteria for the Child Tax Credit.
Earned Income Tax Credit (EITC): This credit is available to low-to-moderate-income taxpayers and is based on earned income, number of qualifying children, and filing status. The credit amount increases with the number of qualifying children.
Dependent Care Credit: Taxpayers who pay for care for a dependent child under age 13 or a disabled dependent to enable them to work or look for work may qualify for a credit of up to 35% of qualifying expenses, subject to certain limits.
Head of Household Filing Status: Taxpayers who provide a home for a qualifying child or relative may be eligible to file as head of household, which offers a higher standard deduction and lower tax rates compared to filing as single or married filing separately.
Claiming dependents can sometimes lead to compli Wications and disputes. Common issues include:
Divorced or Separated Parents: Only one parent can claim a child as a dependent in a given tax year. The IRS typically grants the dependency exemption to the custodial parent, but a non-custodial parent can claim it if the custodial parent signs a written declaration (Form 8332).
Shared Custody: When parents share custody, only the parent who has the child for more than half of the year can claim the dependent. Precise record-keeping of custody days is crucial.
Income and Support Tests: Misunderstanding the gross income or support tests can lead to disqualification. Accurate tracking of the dependent's income and the taxpayer's contributions is necessary.
Residency Requirements: Failing to meet the residency test, such as in cases of prolonged absences, can disqualify a dependent.
Dual Claims: In some situations, more than one taxpayer may claim the same dependent, leading to IRS audits. Coordination among family members is essential to avoid such conflicts.
Claiming dependents on an IRS tax return offers substantial benefits but requires a thorough understanding of the eligibility criteria and careful adherence to IRS rules. By knowing the definitions and requirements for qualifying children and qualifying relatives, taxpayers can maximize their tax benefits while ensuring compliance. Awareness of common issues and proactive management can further streamline the process, preventing disputes and potential penalties.
7/12/24