As any parent knows, dependents are a great way to get tax deductions. Everyone in the U.S. is eligible to receive a “personal exemption” of $3,900 on their taxes. However, if they don’t support themselves (such as children), their personal exemption can be transferred to the person who does support them (such as their parents), by claiming them as dependents.
If you have people in your household that you support, each one may be considered a dependent and can reduce your taxable income by $3,900. However, there are specific rules that must be met in order for this to occur.
Who Qualifies as a Dependent For Tax Purposes?
1. You can’t be someone’s dependent and claim dependents of your own.
Yes, this sounds a bit circular, but if you are claimed as someone else’s dependent, you can’t claim your own dependents. For example, if Sarah and her son move back in with her mother due to a job loss, and Sarah doesn’t have an means to support herself, her mother might qualify to take Sarah as a dependent. However, Sarah cannot then list her son as her dependent – he might actually be the dependent of his grandmother, if she provides his support.
2. The dependent must be a citizen of the United States, or a resident of the United States, Canada, or Mexico.
Even if a potential dependent is your relative, he or she must meet one of these criteria in order to qualify for a personal tax exemption. While this one seems fairly cut and dry, there are some situations where questions arise. For instance, if you’re adopting a child from a different country, and the child is not yet a U.S. citizen, the child may still be considered a dependent if he or she lived with you as a household resident for the whole year.
If you have other questions regarding resident status, Publication 501 has details on determining the proper exemption.
3. The dependent can be married, but can’t file as “married filing jointly” with his or her spouse.
As an example, if Sarah were married when she moved in with her mother, she and her husband must file separately in order for Sarah’s mother to claim her as a dependent.
Claiming Children as Dependents
Most of the time when people take dependents on their tax return, it’s their children they claim. There are five specific criteria that must be met to take a child as a dependent:
- Residency. The dependent must live with you for at least six months out of the year. For divorced parents or for parents serving in the military, this requirement can seem confusing. Generally the custodial parent in a divorced household is the one who can claim the child as a dependent. For any situation in which you or your child did not live together for more than six months due to business, military service, long-term illness, educational requirements, or vacation, you may still be able to claim the child as a dependent. For more details on when, and how, to determine residency, refer to Publication 501.
- Relationship. To qualify as a child, the person must be your son, daughter, brother, sister, adopted child, eligible foster child, or a descendant of any of those (such as grandchildren, nieces, and nephews). Step-siblings, step-children, and half-siblings also meet this qualification. Brothers and sisters can also qualify.
- Age. A child must be under age 19 at the end of the year, unless he or she is under age 24 and a full time student. However, any child who is permanently and totally disabled can be claimed as a dependent, regardless of age.
- Support. The child can’t provide more than half of the money for his or her own support. For example, a young actress might earn more money than her parents, and thus essentially support herself. Another instance would be a child whose care is paid for by a trust fund or other source of money. Neither of these individuals would be eligible to be taken as a dependent.
- Joint Return. If your child files a joint return with his or her spouse, he or she is not an eligible dependent – with one exception. The exception is if your child and his or her spouse file a joint return for the explicit purpose of having withheld taxes returned. For instance, if they only made $1,000 for the year from part time jobs, and those jobs withheld taxes, they could file for the purpose of having those taxes returned and still be eligible dependents on your tax return.
Claiming Other Relatives or Roommates as Dependents
Other than children, who can you take as a dependent?
The requirements for this are somewhat stricter. Generally, you can take someone as a dependent if they didn’t earn more than $3,900 all year and you provided more than 50% of their support. Relatives whom you are supporting do not have live with you (e.g if you are paying for your grandmother to live in her own apartment.)
However, you can also claim a person who is unrelated to you as a dependent if that person lived with you for the entire year, earned less than $3,900, and you provided more than half of his or her support.
What Does Support Mean?
The IRS defines support generally as items provided on behalf of an individual. This includes food, lodging, and other necessities like clothing, transportation, day care costs, medical expenses, education expenses, and even luxuries for personal enjoyment (such as video games or haircuts). You must count the fair rental value of any housing you provide, instead of using the mortgage or rent you actually paid.
Each person can only be taken as a dependent by one person or couple filing jointly. The most common situation where this becomes an issue is for divorced couples who share custody of a child. Generally the parent with whom the child lived the most during the year (the custodial parent) is able to claim the child as a dependent. But he or she has the right to waive that option and allow the other parent to claim the exemption instead. Someone might choose this because the custodial parent’s income is lower or because it’s part of a divorce decree. The custodial parent can use Form 8332 to sign over the right to take the exemption to the non-custodial parent, or attach the part of the divorce agreement that deals with this issue in lieu of completing the form. These rules still apply to stepchildren, even after a divorce.
What’s important to note is that if one parent or one individual claims a person as a qualifying child, no other parent or individual may claim that same person as either a qualifying child or a qualifying relative.
Taking advantage of the dependents tax break can be extremely beneficial financially, as long as you understand and meet the requirements set forth by the IRS. Be sure to check if you’re eligible to take the child and dependent care credit, the child tax credit, and the earned income credit as well.
Do you claim any dependents? How much of an impact have they had on your tax return or tax bill? Share your thoughts in the comments below.