Different Rules for Dependents, Head of Household, and the EITC
Both head of household status and the EITC depend on you having dependents
Tax time brings a lot of questions that may seem simple at first glance but turn out to be complicated. People often wonder whether they can claim certain dependents, whether they qualify for the head of household filing status, or whether they qualify for the earned income tax credit. These three tax benefits are very closely related, all of them designed to help minimize the tax burden for working families. But even though they're related, each has its own unique, separate requirements, which is where things get complicated.
Let's start with dependents because the other two tax incentives – both the head of household filing status and the earned income credit – both require that a taxpayer have one or more of them to be eligible.
Dependents are often children because, by definition, a dependent is one who relies upon someone else for financial support. But this doesn't mean your dependents can only be your sons or daughters. Other types of dependent relationships can exist, such as with parents, grandparents, nieces, nephews and other family members. There are two ways to qualify as a dependent, either under the qualifying child criteria or under the qualifying relative rules.
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. There are no age restrictions if he's totally and permanently disabled. He must have lived in your home for more than half the year. Living away in a dorm room at school is considered a temporary absence from your home so he still qualifies as living with you if your house is his home base. He cannot have provided more than half of his own financial support during the year.
The rules for qualifying relatives are similar, but there are no age or disability limitations, with the exception that 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 more than six months. The dependent's total income for the year must be less than the amount of that year's personal exemption.
Claiming a dependent – or being eligible to claim a dependent – can open the door to several tax-saving benefits. You can claim one personal exemption for each of your dependents, and you may also become eligible for the earned income credit, the child tax credit, the child and dependent care tax credit, and education tax credits or deductions for that dependent, to name just a few. In some cases, a custodial parent who claims her child as a dependent may waive the right to claim the dependent's personal exemption, effectively giving it to the other parent, while still retaining eligibility for head of household filing status and the earned income credit.
Head of Household Filing Status
Filing as head of household widens the income brackets to which each tax rate applies. For example, a head of household filer can earn up to $50,800 and still remain in the 15 percent tax bracket as of 2017. Take away his dependent and he becomes a single filer. As such, he would move from the 15 percent bracket into the 25 percent tax bracket when he earns just $37,950.
To be eligible for head of household status, a taxpayer must have at least one dependent and be unmarried or "considered" unmarried under IRS rules, 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 did not 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 the case for simply claiming someone as a dependent. For example, although your parent does not have to reside with you for you to be able to claim her as a dependent, 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. And the rule regarding the costs of your home is unique to this filing status.
The Earned Income Tax Credit
The earned income credit is a refundable tax credit for lower-income families that can result in a taxpayer having a negative effective tax rate. In other words, you would receive more back as a refund from the IRS than you paid in over the course of the year through income tax withholding.
Children, grandchildren, brothers, sisters, nieces and nephews can qualify a taxpayer 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, to qualify you for this tax credit.
Comparing All the Rules
All these limitations and rules can cause frustration in situations where a taxpayer is caring for and financially supporting another person but there's no relationship between them by blood or marriage. Such a taxpayer might find that he's eligible only for the single filing status and the dependent's personal exemption, but he's not eligible to file as head of household or to claim the earned income credit.
Tax preparation software usually includes questionnaires to help taxpayers determine whether they are eligible to claim a dependent, to file as head of household, and to claim the earned income credit. Many of these interview questions may seem repetitive, but that's because in each case the criteria are slightly different. The IRS also provides a web tool called the EITC Assistant to help taxpayers figure out if they qualify for the earned income credit.
The important takeaway here is that just because you can claim a dependent, it does not automatically make you eligible for other tax perks. If you're unsure where you stand, your best bet would be to invest in quality tax preparation software or consult with a tax professional.