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 $3,650 on their taxes. However, if they don’t support themselves (such as children) their personal exemption can be transferred to the person who is actually supporting them (such as their parents) by claiming them as dependents.
Each dependent you list on your tax return gives you the opportunity to reduce your taxable income by $3,650. So if you have people in your household that you support, or who are otherwise dependent upon you, or you and your spouse, you can get a tax break by adding them as dependents. 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 income or any other other means of supporting herself, the grandmother 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 the 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 getting a personal tax exemption from the government.
3. The dependent can be married, but can’t file as “married filing jointly” with his or her spouse.
So in the example above, if Sarah was married when she moved in with her mother, she and her husband must file separately in order for the grandmother to claim her as a dependent. Otherwise, if Sarah and her husband file as “married filing jointly,” her husband would end up taking on Sarah as a dependent.
Claiming Children as Dependents
Most of the time when people take dependents on their tax return, they claim their children as dependents. There are four 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.
- Relationship – To qualify as a child, they 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-children and half-siblings also meet this qualification. Brothers and sisters can qualify as children if they meet all these requirements.
- Age – They must be under age 19 at the end of the year, unless they are under age 24 and a full time student. However, any child who is permanently and totally disabled can be claimed as a dependent, even if they are over age 19.
- Support – The child can’t provide more than half of the money for their own support. For example, a young actress or singer might earn more money than her parents, and thus essentially be supporting herself. Another instance would be a child whose care is paid for by a trust fund or other source of money. He would not be eligible to be taken as a dependent.
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 will be able to take someone as a dependent if they didn’t earn more than $3,650 all year and you provided more than 50% of their support. Relatives whom you are supporting do not have to have lived with you (e.g if you are paying for your grandmother to live in her own apartment.)
However, and this is important, you can also claim a person who is unrelated to you as a dependent if they lived with you for the entire year and earned less than $3,650, 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 take the child as their dependent, but they have the right to waive that option and allow the other parent to take the extra exemption on their taxes. This might be because the custodial parent’s income is lower or because it’s part of the 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 for stepchildren, even after a divorce.
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.
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.
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