Claiming Dependents on Your Federal Tax Return
The Tax Rules for Claiming Children and Relatives as Dependents
Claiming one or more dependents on your federal tax return can save you a good bit of money. As of 2017, the Internal Revenue Code is set up to allow taxpayers to deduct personal exemptions for themselves as well as for each dependent they claim.
These deductions subtract from the income they must pay taxes on. A slew of tax credits are based on the number of dependents you have as well, including the child tax credit, the child and dependent care tax credit and the earned income tax credit. Wait, there's more. If you're not married and you support a dependent, this can entitle you to use the head of household filing status, which is much more advantageous than filing as a single taxpayer.
Having dependents is definitely a good thing at tax time, but it's important to know the rules that determine who you can claim and under what circumstances.
An Important Note
As of December 2017, the House of Representatives and the U.S. Senate were embroiled in hashing out the terms of the proposed Tax Cuts and Jobs Act, which would have a significant impact on the rules explained here. Both the House and the Senate have proposed a version of this Act, and it remains to be seen whether they'll compromise on their differences and the bill will be passed into law. If it is passed into law, the exact provisions are still unknown as of the time of publication.
That said, both the House and the Senate would like to do away with personal exemptions, which include deductions for your dependents. They offer other tax perks in exchange for this, but the bottom line is that we can only be sure that these rules apply to the 2017 tax year. The tax landscape might change significantly when the calendar flips over to 2018 on January 1, but none of the provisions of the Tax Cuts and Jobs Act are expected to be retroactive. Of course, that too might change.
Rules That Apply to the Taxpayer
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.
As an example, maybe you're 23 years old, have a child, and you live at home with your parents. You're also a full-time student so you qualify as your parents' dependent. You can't claim your child as your dependent if your parents claim you, and your parents can't claim you if you do claim your child.
Rules that Apply to Your Dependents
You can't claim a dependent who is married and files a joint return, 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 only filed so the couple could claim a refund. Additionally, there would have been no tax liability for either spouse if they had filed separate returns.
Your dependent must be a U.S. citizen, a national or resident alien of the United States, or a resident of Canada or Mexico. A dependent can be claimed by one and only one taxpayer in any given year. This means that if you and your spouse are no longer married so you can't file a joint return, you both can't claim your child as a dependent. He must be claimed by one of you or the other.
Qualifying Children and Qualifying Relatives
Your dependent must be either a qualifying child or a qualifying relative. Different rules apply to each.
- Must be related to you. This doesn't necessarily mean you're his biological parent. You might be his brother, aunt, foster parent, stepparent or even a half-sibling. But there must be a legal or familial relationship.
- A child can only be your dependent until his 19th birthday unless he's a full-time student. In this case, you can continue to claim him as a dependent until he reaches age 24. There's no age limit for children who are disabled.
- If the child works, he cannot contribute more than half his own support for the year. This is different from the tax laws that applied prior to 2005 when a taxpayer had to provide more than half the support for the child. According to IRS Publication 501, total support includes what you spend to provide "food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities." If the total cost of your child's support was $24,000 for the year, he can contribute up to $12,000 if he works or otherwise has income of his own, but he can't contribute $12,001. It used to be that the taxpayer had to pay for at least $12,001 of his support to be able to claim him as a dependent.
- Your child dependent must live with you for more than half the year. Time spent away at college doesn't count as living away from you. More than half a year means, at a minimum, six months and one day. If you share custody, you might want to keep a log of where the child spends each night.
You can also claim a qualifying relative as a dependent. Some relatives must live with you in your home for the full year, but exceptions exist for certain close relatives like your parent, grandparent, sibling, niece or nephew. These are the rules for qualifying relatives:
- Your relative's income must not exceed that of the amount of the personal exemption for that tax year.
- You must provide more than half that person's support according to the same rules for what constitutes support for a child dependent. If multiple people support a single person, such as because you and your siblings are collectively supporting your parent, you can file a Multiple Support Agreement with the IRS that will allow just one of you to claim the supported person as a dependent—but you all have to agree as to which one of you that's going to be.
- If your dependent must live with you because he's not closely enough related to you, your relationship can't violate local law. For example, if your state prohibits co-habitation with a married person, you can't claim a married individual as your dependent even if you meet all the other criteria.
- Domestic partners can be claimed as dependents under the qualifying relative tests.
The Risk of an Audit
The Internal Revenue Service will inevitably audit tax returns where two or more taxpayers attempt to claim the same dependent. Only one taxpayer can win in this situation. The losing taxpayer will probably have to pay additional taxes, plus penalties and interest. The IRS will use the following tie-breaker tests to determine which taxpayer is eligible to claim the dependent. The tie-breaker tests are listed in order of priority.
The taxpayer most eligible to claim a child as a dependent under the qualifying child criteria is:
- A parent
- The parent with whom the child lived for the longest time during the year. Chances are the child will spend at least one day more with one parent than the other parent because there are usually 365 days in a year.
- The parent with the highest adjusted gross income if the child spent exactly an equal amount of time with each of them.
- If neither taxpayer is the child's parent, the taxpayer with the highest adjusted gross income gets to claim the child.
A non-qualifying parent can still claim the child as his dependent if the qualifying parent releases his or her claim to the dependency exemption by filing IRS Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents. You can indicate the year or years for which you're agreeing to release the exemption on this form. You can also revoke the release if you later change your mind.
A Word of Warning
Protect yourself by making absolutely sure you're eligible to claim each dependent on your return. Make sure you have documents that will support your claim.