Claiming Dependents on Your Federal Tax Return
The TCJA changes things a bit, but a lot of dependent tax breaks remain
Claiming one or more dependents on your tax return has historically saved taxpayers a good bit of money. In addition to other tax breaks, the Internal Revenue Code used to allow taxpayers to deduct personal exemptions for themselves as well as for each dependent they could claim. Unfortunately, this provision was eliminated beginning in 2018.
Having dependents can still save you some tax dollars, however, and they're still worth claiming.
The Status of Personal Exemptions
These deductions could be taken from your taxable income through tax year 2017. You can still claim them on the tax return you file in 2018 for that year, or if you file an amended return for tax year 2017 or earlier. But then the Tax Cuts and Jobs Act (TCJA) went into effect on Jan. 1, 2018, and—among numerous other changes—it eliminated the provision for personal exemptions.
The TCJA is set to expire at the end of 2025. 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 effect the status of these exemptions.
Other Dependent-Related Tax Breaks
A slew of tax credits are still based on the number of dependents you have, including the Child Tax Credit, the Child and Dependent Care Tax Credit, and the Earned Income Tax Credit. The American Opportunity Tax Credit is unaffected by the new law, as is the Lifetime Learning Credit.
Having dependents can add to the value of the medical expense deduction, as well as the tuition and fees deduction. And it can qualify you for the head of household filing status if you're not married and you support a dependent, which is much more advantageous than filing as a single taxpayer.
Some of the dependent rules are marginally different for purposes of claiming these credits, but overall, the rules mirror those for claiming dependents and personal exemptions in previous tax years.
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 who 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 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. 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.
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 his biological parent. You might be his brother, aunt, foster parent, stepparent, or even a half-sibling. There must simply be a legal or familial relationship.
A child can only be your dependent until his 19th birthday unless he's a full-time student. If so, 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 to 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.
The child must live with you for more than half the year. Time spent away at college doesn't count as living away. More than half a year means, at a minimum, six months and one day, so 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 close relatives like your parent, grandparent, sibling, niece, or nephew.
Your relative's income must not exceed that of the amount of the personal exemption for that tax year. Yes, personal exemptions are gone now, but the tax code still includes a provision for what the exemption would have been worth for purposes of defining dependents for other tax breaks. It's expected to be $4,150 in 2018, and it won't be less than the 2017 exemption amount of $4,050.
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 in writing as to which one of you that's going to be.
If your dependent must live with you because he's not closely related to you, your relationship can't violate local law. For example, you can't claim a married individual as your dependent if your state prohibits co-habitation with a married person, 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 when 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 uses tie-breaker tests to determine which taxpayer is eligible to claim the dependent. These 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 as opposed to 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.
- 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 he actually spent more time with.
- 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.
This rule does not apply to all tax credits and deductions, however. In some cases, the right to claim the child cannot be transferred.
A Word of Warning
Protect yourself by making absolutely sure you're eligible to claim each dependent on your tax return. Make sure you have documents that will support your claim, and check the rules for each tax credit you're claiming to pin down any variances in qualifying rules. Better yet, check with a tax professional before you file your return. The TCJA rules are complicated and 2019 is expected to be a challenging filing season.