Claiming Dependents on Your Federal Tax Return
The TCJA changed things, but a lot of dependent tax breaks remain
Claiming dependents can save you a good bit of money at tax time. It can qualify you for the head-of-household filing status as well as various tax deductions, and even a few tax credits. Some credits also increase with the number of dependents you claim, such as the itemized medical expense deduction and the tuition and fees deduction.
The exact rules for dependents can be marginally different for purposes of claiming various credits and deductions, but they mirror those for being able to claim dependents in general.
Tax Credits and Deductions for Dependents
Several tax credits are based on the number of dependents you have, including:
- The Child Tax Credit
- The Additional Child Credit
- The Child and Dependent Care Tax Credit
- The Earned Income Tax Credit
- The Credit for Other Dependents
The Child Tax Credit
The Child Tax Credit was expanded under the American Rescue Plan Act (ARPA), signed into law March 11, 2021, making it worth $3,600 per child dependent under the age of 6 and $3,000 for children between ages 6 and 17. Individual taxpayers with modified adjusted gross incomes (MAGIs) up to $75,000 ($112,500 for heads of household) and married taxpayers filing jointly with MAGI up to $150,000 are eligible for the full credit. These changes apply to 2021 only.
ARPA eliminates any minimum income threshold to be eligible for child tax benefits in 2021. Also, the credit is now fully refundable, meaning the taxpayer gets back the full amount of the credit, even if it exceeds the amount in taxes due. So, if you owe $1,000 in taxes, you'll still get back $2,000 for a child up to age 17, and an additional $500 if they're below age 6.
There's also the $500 Credit for Other Dependents that was introduced in 2018. It’s something of an offshoot of the Child Tax Credit. It covers children and adults who don't meet the qualifying child rules because of age.
The Child and Dependent Care Credit
The Child and Dependent Care credit was also expanded for 2021 only under ARPA and is now up to 50% of the first $8,000 you spend for care for one dependent, or $16,000 for two or more dependents, while you work or look for work. Some complicated rules apply to the exact amount.
The Earned Income Tax Credit
The Earned Income Tax Credit is worth up to $6,660 in 2020 if you have three or more qualifying child dependents, but income limits apply.
2020 Status of Personal Exemptions
The Internal Revenue Code used to allow taxpayers to deduct personal exemptions for themselves, as well as for each of their dependents. These deductions reduced gross income to arrive at taxable income through tax year 2017. The provision was eliminated by the Tax Cuts and Jobs Act (TCJA) beginning in 2018.
The TCJA is set to expire at the end of 2025, however. One of three things can happen at that time. Congress might let the law die a natural death, and personal exemptions would return. Or Congress might renew the TCJA in its present form, so we'd be without personal exemptions for another stretch of years. Finally, Congress could resurrect the TCJA, but with changes that might or might not affect the status of these exemptions.
Who Qualifies for Dependent Credits?
A dependent can be claimed by only one taxpayer in any given year. You and your spouse or ex can’t both claim your child as a dependent on separate returns. Your child must be claimed by one of you or the other. The same goes for older dependents. You and your siblings can’t all claim your parent.
You can't claim anyone as your dependent if you're someone else's dependent. Likewise, no one else can claim you as a dependent if you claim a dependent. For example, if you live with your parents and have a child, you can't claim your child as a dependent if your parents claim you.
Qualifying Rules for Dependents
The rules that apply to dependents are a bit trickier. You can't claim a dependent who is married and files a joint return with their spouse, with one exception: A married person can file a joint return and still be claimed as a dependent by another taxpayer if the joint return was filed only so the couple could claim a refund. Neither spouse would have had any tax liability if they had filed separate returns.
Your dependent must be a U.S. citizen, a national, a resident alien of the U.S., or a resident of Canada or Mexico.
Qualifying Child Dependents and Qualifying Relatives
All dependents fall into one of two categories: They must be either a qualifying child or a qualifying relative. Different rules apply to each.
A qualifying child must be related to you, but this doesn't necessarily mean that you have to be their biological parent. You can be their brother, aunt, foster parent, adoptive parent, stepparent, or even a half-sibling. There must simply be a legal or familial relationship.
A child can only qualify as your dependent until their 19th birthday unless they're a full-time student. You can continue to claim them as a dependent until they reach age 24 in this case.
There's no age limit for children who are disabled.
The child must live with you for more than half the year. Time spent away at college doesn't count as living away, because they're expected to return to your home as their primary residence at some point. More than half a year means six months and one day at a minimum, so you might want to keep a log of where the child spends each night if you share custody.
The child can't contribute more than half to their own support for the year if they work. This is different from the tax laws that applied prior to 2005 when the taxpayer had to provide more than half the support for the child.
You can also claim a qualifying relative as a dependent if they're too old to qualify as your dependent child. Some relatives must live with you in your home for the full year, but exceptions exist for close relatives like your parent, grandparent, sibling, niece, or nephew.
Your relative's income can't exceed the amount of the personal exemption for the tax year. The tax code still includes a provision for what the exemption would have been worth for purposes of defining dependents for other tax breaks even though personal exemptions were eliminated by the TCJA in 2018. The income limit is $4,300 for the 2020 tax year, the return you'll file in 2021.
You must provide more than half that person's support needs according to the same rules for what constitutes support for a child dependent.
Your relationship can't violate local law if your dependent must live with you all year because they're not closely related to you. For example, you can't claim a married individual as your dependent if your state prohibits cohabitation with a married person, even if you meet all the other criteria.
Domestic partners can be claimed as dependents under the qualifying relative tests, although it is unlikely that domestic partners will meet IRS gross income requirements.
You Can Waive Your Right to a Dependent
The rule that no two taxpayers can claim the same dependent is carved in stone, but the IRS does provide a couple of options that allow you to transfer your right to claim your dependent to someone else.
The Multiple Support Declaration
You can file Form 2120, the Multiple Support Declaration, with the IRS if multiple people support a single person, such as because you and your siblings are collectively supporting your parent. This will allow just one of you to claim the supported person as a dependent—but you all have to agree in writing as to which one of you that's going to be, and that person must have paid for more than 10% of the dependent's needs for the year.
The IRS indicates that “total support” payments include those toward lodging, groceries, clothing, medical and dental care, education, transportation, and recreation.
Release of Claim to Exemption
A non-qualifying parent can still claim their child as their dependent if the qualifying parent releases their claim by filing Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, with the IRS. You can indicate the year or years for which you're agreeing to release your claim. You can also revoke the release if you later change your mind.
This rule doesn’t apply to all tax credits and deductions, however. The right to claim the child can’t be transferred in some cases, such as to claim head of household filing status. The child must actually live with you in order for you to qualify for this status.
What Happens When Two Taxpayers Claim the Same Dependent?
The IRS will step in to straighten things out if two tax returns are submitted claiming the same dependent. It will inevitably flag both returns if its computer finds that the dependent’s Social Security number has been entered on two or more tax returns. The losing taxpayer will probably have to pay additional taxes, plus penalties and interest.
The IRS uses tie-breaker tests to determine which taxpayer is eligible. In order of priority, the taxpayer most eligible to claim a child as a dependent under the qualifying child criteria is:
- A parent rather than another relative.
- The parent with whom the child lived the longest during the year. Chances are, the child will spend at least one day more with one parent than the other because there are usually 365 days in a year, unless the child spent some time in another home.
- The parent with the highest adjusted gross income if the child spent exactly an equal amount of time with each parent or if it can't be determined who they actually spent more time with.
- The taxpayer with the highest adjusted gross income gets to claim the child If neither taxpayer is the child's parent.
- Protect yourself by making absolutely sure you're eligible to claim each dependent on your tax return before you do so.
- Make sure you have documents that will support your claim.
- Check the rules for each tax credit you're claiming to pin down any variances in qualifying rules.
- Check with a tax professional before you file your return if you’re at all unsure.