You can't take a deduction for money you send to your son or daughter in prison—or anyone else, for that matter. Money, food, clothing, toys, and other items sent to anyone for any reason and without compensation is usually considered a gift under the tax code. Gifts aren't tax-deductible, so the short answer to this question is no.
An exception exists when you give money or other items to a qualified charity. Charitable donations can be included as an itemized deduction on Form 1040 Schedule A.
There's an outside chance you could get a tax break or two for your child, but deducting the value of money or anything else you send them isn't one of them.
If Your Child Is Your Dependent
You might be eligible to claim your child as a dependent under the qualified children rules if they lived with you for more than half the year before going to prison, and if they didn't provide more than half their own financial support during the year. They also must be younger than age 19 on the last day of the year, provided that they're not a student. If you are eligible under this scenario, you may benefit at tax time from the dependents you claim.
You might normally be able to claim a child as a qualifying relative if they're 19 or older, but this loophole closes if your child is in prison. Qualifying relative rules require that they live with you all year, or that you pay at least half of their support needs if they live elsewhere. Therefore, this would not be the case if the child were incarcerated.
Angela, a single parent, has two children, Barbara and Charles. Both children live with her. Charles gets in trouble with the law and goes to prison in July. Charles remains incarcerated for the rest of the year. Angela might be entitled to claim both her children as dependents on her return, based on this scenario.
One of the crucial tests for claiming a child dependent is that they must depend on others for more than half of their financial needs throughout the year. Angela can prove that both children lived with her for more than half the year, because Charles wasn't incarcerated until July.
Angela can also prove that neither child provided more than half of their own support. Her son in prison is clearly not earning an income and contributing to his own support. In this case, Angela can claim him as a dependent.
A Tax Court Decision
While the specific situation of an incarcerated dependent is not mentioned in tax law, there was a Tax Court case in 2002 that addressed this topic. The issue was whether the parent could claim her son as a dependent and as a qualifying child for the Earned Income Tax Credit even though he was in prison all year.
The Tax Court reasoned that since the parent did not provide more than half the child's support, the parent could not claim the son as a dependent. Furthermore, she couldn't claim him for Earned Income Tax Credit purposes because the son didn't live with his mother for more than six months of the year.
Dependent Definition Changes After Tax Court Decision
The definition of a dependent has changed since the Tax Court issued this decision in 2002. Under current rules, it can be easier for an incarcerated child to be claimed as a dependent, because the law provides that dependents cannot provide more than half their own support (rather than that parents must directly pay more than half, which was the rule in 2002).
Other Child-Related Tax Benefits
Other child-related tax benefits, such as the head-of-household filing status, the Earned Income Credit, and the Child Tax Credit, all have different eligibility criteria. For example, the head-of-household status requires that a taxpayer pay for more than half of maintaining the child's main home during the year, and this might not be the case if the child were incarcerated. Additionally, married parents can't qualify for the head-of-household status.
Could You Owe an Additional Tax?
Although gifts aren't tax-deductible, they can be taxable under some circumstances—and the gift tax is payable by the donor, not the recipient of the gift.
You can give away up to $15,000 per person per year in tax years 2020 and 2021 without having to pay gift tax. Every dollar you give to a person beyond the first $15,000 will be subject to the gift tax though. However, you can get around this consequence by taking advantage of your lifetime gift tax exemption. In addition to the annual exclusion, you have a lifetime exemption of $11.58 million (in tax year 2020) that you can chip away at in any year when your gifts would otherwise be subject to the gift tax. This figure keeps pace with inflation and will increase to $11.7 million in the 2021 tax year.
Keep in mind that using up your lifetime exemption could affect estate taxes after you die. The more you use up by giving taxable gifts during your lifetime, the less will be available to shield your estate from taxation when you pass your assets on to heirs.