Different Rules for Claiming Dependents, Head of Household, and the EIC
Head of household status and the EIC depend on you having dependents
It only makes sense that taxpayers want to grab every single break they're entitled to, and having dependents can qualify you for quite a few. Personal exemptions for yourself and your dependents have been eliminated from the tax code at least temporarily, but this doesn't mean that claiming them doesn't come with some reward.
Some of these tax benefits are closely related, and they're all designed to help minimize the tax burden for working families. But each has its own unique, separate requirements, and this is where things can get complicated.
Dependents are often children because, by definition, a dependent is someone who relies upon you for financial support. But this doesn't mean that your dependents can only be your sons or daughters—far from it.
Other types of dependent relationships can exist as well, such as with stepchildren, parents, grandparents, nieces, nephews, siblings, and other family members. Different rules can apply to some, however.
There are two ways someone can qualify as your dependent, either under the qualifying child criteria or under the qualifying relative rules.
Rules for Qualifying Children
A qualifying child must be younger than age 19 on the last day of the tax year, or age 24 if he's a full-time student. He must be younger than you, and younger than both you and your spouse if you're married.
There are no age restrictions for children who are totally and permanently disabled.
Your qualifying child must have lived in your home in the U.S. for more than half the year. This does not include Puerto Rico or any of the U.S. possessions. Living away in a dorm room at school is considered a temporary absence from your home, however, so your dependent would still qualify as living with you if your house is "home base."
In some cases, a custodial parent who has the right to claim her child as a dependent can waive that right, effectively giving it to the other parent, while still retaining eligibility for head of household filing status and the Earned Income Tax Credit.
Your child dependent does not have to be your biological child. Stepchildren, adopted children, some foster children, siblings, step-siblings, half-siblings, or any descendants of these individuals qualify as well.
Your child dependent can't file a joint married tax return with anyone unless it's purely for purposes of claiming a refund—your child or his spouse did not have any tax liability that required filing the return.
The rules for qualifying relatives are similar, but there are no age or disability limitations—with one exception. The dependent cannot be the qualifying child of another taxpayer.
Some relatives, including your parents and siblings, are exempt from the rule that they must live in your residence, but those who do have to live with you must reside in your home for the entire year, not just for more than six months. You must provide more than half their total support for the year.
There are special rules for taxpayers who jointly provide financially for a qualifying relative, such as a parent.
Taxpayers who jointly support a dependent can enter into a Multiple Support Declaration and file it with the IRS, effectively relinquishing the dependent to one of the others. You can do this yearly, changing the dependent from one of you to another so everyone gets to claim the benefit as time goes by.
The Income Requirement
A qualifying relative's total income for the year must be less than the amount of that year's personal exemption, and this is where the situation gets tricky.
The Tax Cuts and Jobs Act (TCJA) eliminated personal exemptions from the tax code when it went into effect in January 2018. But the TCJA retains provisions for the amount of the exemption for purposes of determining dependents for other tax breaks. It was initially announced that the exemption amount for 2018, following passage of the TCJA, would be $4,150, but then the TCJA made yet another change.
It tweaked inflationary adjustments to certain tax provisions so they're calculated using the chained consumer price index (CPI), rather than the traditional CPI as has been the case in the past. This is not really a big change, however. The exemption amount and income cap was indeed $4,150 in 2018.
The IRS has not yet announced an income limit for 2019 as of August 2019, but it should not be significantly different.
Only One Taxpayer Can Claim a Dependent
Only one taxpayer can claim the same child or qualifying relative as a dependent, and the IRS is pretty strict about this. It will almost certainly invite an audit—or least an official letter of inquiry—if two or more taxpayers attempt to do so.
Parents always have the first right to claim a child. If two parents otherwise qualify, the IRS will award the dependent to the parent with whom the child lived most during the tax year. The right will default to the parent with the highest adjusted gross income (AGI) if the child spent equal time with each of them.
Head of Household Filing Status
Filing as head of household widens the income brackets to which each tax rate applies, and this can be advantageous.
For example, a head of household filer can earn up to $52,850 before he moves into the 22% tax bracket as of 2019. This is up from $51,800 in 2018 because these brackets are also adjusted for inflation. The 22% threshold is only $39,475 for single filers in 2019, up from $38,700 in 2018.
Having at least one dependent is a critical element of qualifying for head of household. An unmarried taxpayer without a dependent is a single filer.
A taxpayer must have at least one dependent and be unmarried or "considered" unmarried under IRS rules to be eligible for head of household status, so this tax benefit is particularly well-suited for single parents. You can still qualify if you're separated from your spouse but not legally divorced if you don't live with him after June 30 of the tax year.
Unlike the rules for simply claiming a dependent, qualifying as head of household requires that your dependent must be closely related to you by birth or marriage. Your dependent must reside with you for more than half the year, and you must provide more than half the total costs of keeping up your home.
The last two requirements are not always the case for simply claiming someone as a dependent. For example, your parent doesn't have to actually reside with you for you to be able to claim her as a dependent, but she does have to live with you for at least half the year for you to qualify as head of household—unless you have another dependent who does live with you all year.
The rule regarding the costs of your home is unique to this filing status as well.
The Earned Income Tax Credit
The Earned Income Tax Credit (EIC) is a refundable tax credit for lower-income families. In other words, the IRS will actually send you a refund for any portion of the credit that remains after applying it to eliminate any tax bill you might owe.
Children, grandchildren, brothers, sisters, nieces, and nephews can all qualify as dependents for EITC purposes, but parents, grandparents, and other types of relationships generally will not. Your dependent person must be younger than age 19, or age 24 if he's a full-time student for at least five months out of the year.
Comparing All the Rules
All these limitations and rules can cause frustration when a taxpayer is caring for and financially supporting another person who doesn't qualify as a dependent. You might find that you're eligible only for the single filing status and can't claim the EITC.
Tax preparation software usually includes questionnaires to help taxpayers determine whether they're eligible to claim a dependent, to file as head of household, or to claim the Earned Income Credit or other tax breaks. Many of these interview questions might seem repetitive, but that's because the criteria can be slightly different in each case.
The IRS also provides a web tool called the EITC Assistant to help taxpayers figure out if they qualify for the earned income credit.
Get Help If You're Still Confused
The important takeaway here is that just because you can claim a dependent, it doesn't automatically make you eligible for other tax perks. Your best bet would be to invest in quality tax preparation software or consult with a tax professional if you're unsure where you stand.