Most people think of a dependent for tax purposes as a child who lives with the taxpayer and spouse, if married. For each dependent on the return, the taxpayer gets an associated exemption of $4,050 (for 2016), which is used to reduce taxable income on page two of Form 1040 (line 42).
For example, if a couple is filing a joint return (MFJ) and has two children as dependents, they are entitled to a total of four exemptions on their return, or $16,200 to reduce their adjusted gross income, in addition to their standard deduction (another $12,600 for 2016). So with a standard deduction for MFJ and four exemptions, their adjusted gross income is reduced by $28,800 to arrive at “taxable income” (Form 1040, line 43).
This is just one of the potential benefits of dependent children.
Other benefits include the Child Tax Credit (and associated Additional Child Tax Credit), the Child and Dependent Care Credit, and the Earned Income Tax Credit. The Child Tax Credit is available until the year the child turns 17 and can be as much as $1,000 per child. The Child and Dependent Care Credit is available until the year the child turns 13 (unless disabled, then no age limit). The Earned Income Tax Credit (EITC) is available while the child is under 19 (or 24 if in school). The EITC amount depends upon filing status, qualifying children and income.
For more help, check out our complete Tax Guide.
General Rules About Dependency
Before we look at the definition of “Qualifying Child” and “Qualifying Relative,” there are some rules that apply to everyone.
First, if you are a dependent of another taxpayer, you cannot claim any dependents yourself. For example, let’s assume Charlene, age 18, had a son Barton in 2016, and they both live with Charlene’s father, Henry. Henry is employed and pays all of the costs of maintaining the household. Charlene had $2,500 of income from her part-time job. In this scenario, both Charlene and Barton are dependents of Henry. Charlene cannot claim Barton because she, herself, is a dependent of her father, even if Charlene has income and is filing a return to claim a refund of her federal withholding.
Secondly, dependents must be a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico.
Thirdly, you cannot claim a married person who files a joint return as a dependent, unless the return is filed only to claim a refund of withheld income tax or estimated tax paid. So in the example above, if Charlene were married to Don, who is a full-time student and not employed, and she and Don file a return Married Filing Joint only to claim her refund of withheld federal income tax, Charlene is still Henry’s dependent.
Fourthly, you can claim someone as a dependent only if they are your “Qualifying Child” or your “Qualifying Relative.”
This term, “Qualifying Child,” is one the IRS uses to designate a dependent who meets certain conditions. If the MFJ test above is met, there are four other tests for someone to be your “Qualifying Child.”
The term “Child” is rather broadly defined. It includes son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descent of any of them. So your niece or nephew is included (daughter or son of your brother or sister), but not your cousin (daughter or son of your aunt or uncle).
There are three possibilities for age:
- The child must be under age 19 at the end of the tax year and younger than you (or your spouse if filing jointly).
- Or, the child must be under the age of 24 at the end of the tax year, a student, and younger than you (or your spouse if filing jointly)
- Or, the child can be any age if the child is permanently and totally disabled
The child must have lived with you for more than half the year. Children who are temporarily away from home – for example, at camp, on vacation, or at school – are still considered to be residing with you. Children who are born or who were born, but died during the year, are considered to have lived with you all year.
There are also exceptions for children of divorced or separated parents or of parents who lived apart, and for kidnapped children. Kidnapped children are considered to meet the residency test if they are determined to have been kidnapped by someone who is not a member of your family or the child’s family, and if the child lived with you more than half of the part of the year before the date of kidnap.
For children of divorced or separated parents (or parents who did not live together), the situation, at first, seems clear enough: the child is considered to reside with the custodial parent. However, the child will be treated as the qualifying child of the non-custodial parent if all four of the following are true:
- The parents:
- are divorced or legally separated under a decree of divorce or separate maintenance
- are separated under a written separation agreement
- lived apart at all times during the last six months of the year
- The child received over half of his/her support from the parents
- The child is in the custody of one or both parents for more than half the year
- Either of the following statements is true:
- The custodial parent signs a written declaration that he/she won’t claim the child as a dependent and the non-custodial parent attaches the declaration to his/her return. Form 8332 can be used for this purpose.
- A pre-1985 decree of divorce or separate maintenance (or written separation agreement) that applies to the tax year in question states that the non-custodial parent can claim the child as a dependent and wasn’t changed after 1984 to say the non-custodial parent cannot claim the child, and the non-custodial parent provides at least $600 for the child’s support during the year.
If all four of these statements are true, only the non-custodial parent can claim the child as a dependent and claim the child as a qualifying child for the Child Tax Credit. Note, however, that this does not qualify the non-custodial parent for Head of Household filing status, the child and dependent care credit, the earned income credit, or the health care tax credit. More details are contained in IRS Publication 501.
To be a qualifying child, the prospective dependent cannot have provided more than half of his/her own support. For example, if you provided $6,000 of your son’s support, but he had a part-time job and provided $8,000 of his own support, he is not your qualifying child because he provided more than half of his own support.
If the joint-return test under the General Rules, as well as the four tests are met (Age, Relationship, Residency, and Support), the child is your Qualifying Child and can be claimed as a dependent.
Qualifying Child of More Than One Person
On occasion, a child may meet the Age, Relationship, Residency, Support and joint-return tests for more than one person. Though the child is the Qualifying Child of both people, only one may claim the child as a dependent.
Along with the exemption for the dependent, the following benefits also accrue to the taxpayer (provided they qualify):
- Head of Household filing status
- Child tax credit
- Child and dependent care credit
- The exclusion from income of dependent care benefits
- The earned income tax credit
The other person cannot claim any of these benefits, which means that you cannot decide to split them up between you.
So how is this conundrum resolved? Do they just flip a coin, or come to an agreement some other way? Human nature being what it is, the IRS has tiebreaker rules to make the determination:
- If only one person is the child’s parent, the child is the qualifying child of the parent.
- If the parents file a joint return and can claim the child, the child is the qualifying child of the parents.
- If the parents do not file a joint return, the IRS will consider the child the qualifying child of the parent with whom the child lived for the longer period during the year. If the child lived an equal number of days with each parent, the IRS will treat the child as the qualifying child of the parent with the higher adjusted gross income (AGI) for the year.
- If no parent can claim the child, the child is treated as the qualifying child of the person with the highest AGI for the year.
- If a parent can claim the child as a qualifying child, but does not, the child is treated as the qualifying child of the person with the highest AGI, provided that AGI is higher than either parent who can claim the child (if the parents file a joint return, the total AGI can be divided in half to make the highest-AGI determination).
There are multiple illustrative examples in IRS Publication 501.
If a person is not your qualifying child, they may be your qualifying relative if they meet the four tests required. Most of these tests are determined by what they are not, rather than what they are.
Not a Qualifying Child Test
A child is not a qualifying relative if they are your qualifying child or the qualifying child of another person.
Member of Household or Relationship Test
To meet this test, the person must live as a member of your household all year, or be related to you as a relative who does not have to live with you. If at any time during the year the person was your spouse, that person cannot be your qualifying relative.
If a person is related to you in any of the following ways, they do not have to live with you all year as a member of your household to meet this test:
- Your child (even if adopted), stepchild, foster child or a descendant of any of them
- Your brother, sister, half brother, half sister, stepbrother or stepsister
- Your father, mother, grandparent, or other direct ancestor, stepfather or stepmother, but not foster parent
- A son or daughter of your brother or sister (so niece or nephew)
- A son or daughter of your half brother or half sister
- A brother or sister of your father or mother (so aunt or uncle)
- Your in-laws: son or daughter, brother or sister, father or mother
Any of these relationships that were established by marriage are not ended by death or divorce. Note that a cousin (a son or daughter of a parental sibling) does not meet this test. They would have to live with you all year as a member of the household to qualify as a qualifying relative.
If you file a joint return, the person can be related to either you or your spouse, and does not need to be related to the spouse who provided the support.
Gross Income Test
In order to meet this test, the prospective qualifying relative must have gross income less than the personal exemption amount of $4,050 (for 2016).
Gross income is defined as all income in the form of money, property, and services that are not exempt from tax. This includes net income of a business after subtracting the cost of goods sold, rental income before expenses, partnership share of income, taxable unemployment compensation, and taxable scholarship income. Tax exempt income, such as social security benefits are not included in gross income. The income from a sheltered workshop by anyone who is totally and permanently disabled at any time during the year is not included in gross income.
To meet this test, you generally must provide more than half the support of the prospective qualifying relative. The obvious question is, “How do you determine whether this test is being met?”
The IRS has the answer: you compare the amount you have contributed to the potential qualifying relative’s support to the entire amount of support that person received from all sources. This includes amounts the person contributes from their own funds. But, it does not include amounts from their own funds that are not spent on support.
As an example, let’s suppose you mother received $2,400 from an IRA distribution and $300 in interest. Total income is $2,700. She spends $2,000 for lodging and $400 for recreation, and puts $300 in savings. She has contributed $2,400 to her own support (the $300 she put in savings was not used for her own support this year). If you have contributed more than $2,400, then the support test is met.
Support includes amounts spent for food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. Support does not include federal, state and local income taxes paid; social security and Medicare taxes paid; life insurance premiums; funeral expenses; scholarships received by your child if your child is a student; and survivor’s and dependents’ educational assistance payments used for educational expenses of the person who receives them.
Sometimes a person (for example, a parent) is supported by more than one person (their children, for example) and no one person provides more than half of the total support. In this case, those who provide more than 10 percent of the support can decide that each, in succeeding years, can claim the person supported as their qualifying relative for that year.
Bonus Question: Is My Pet a Dependent?
The short answer is, “No,” despite how much you spend on your pet. Although the pet may meet the Residency, Age, Support and Joint Return tests, it fails the Relationship test (not your child or other blood relative). Neither is your pet a qualifying relative, even if the pet meets the Residency, Gross Income, Support and Member of the Household tests and might seem to be your Qualifying Relative.
Unfortunately, your pet is not a U.S. Citizen, nor does he/she have a Social Security Number. It seems you have to be a person to be a citizen.
When you can claim a dependent because they are your qualifying child or qualifying relative, many tax benefits may accrue to you. Besides the dependent exemption ($4,050 in 2016), you may also qualify for the child tax credit, the child and dependent care credit, educational benefits (if the dependent is in college), and the earned income tax credit.
All together, these benefits can be worth thousands of dollars, and several of them are refundable, meaning they don’t just offset a tax liability, but add to your refund. For more help, check out our complete Tax Guide.
Are you able to use qualifying dependents to reduce your taxable income?