Posted by Income Taxes and Bookkeeping LLC

Dependents

Dependents

What is a dependent?

A dependent is a qualified person other than the taxpayer or spouse, who gives the taxpayer the right to request a dependency exemption on their income tax return. Taxpayers who prove they have a dependent can also use this filing status to qualify for certain tax credits.

The Internal Revenue Code (IRC) determines a person's eligibility to be a taxpayer's dependent for dependency claims.


Understanding who a dependent is

A dependent can be a qualified child or a qualified parent. Dependency status is determined by the Internal Revenue Code (IRC) test. To qualify for dependent status, three tests must be completed for all dependents: the dependent taxpayer test, the joint return test, and the resident test. Anyone who can be claimed as a dependent of another taxpayer cannot claim anyone as a dependent in their tax return. Anyone who has filed a joint return (such as a married person) cannot claim anyone dependent on the tax return. Finally, to be declared a dependent, a person must be a US citizen, a US national, a US resident alien, or a resident of Canada or Mexico.

Only one taxpayer may claim a dependent on his or her tax return, which is especially important for parents with dual custody. In some cases, court orders already made or a written statement from the custodial parent may assign the non-custodial parent the claim.


Dependent types

Qualifying child

Certain tests are specifically used to determine if a dependent is a qualified child or if a dependent is a qualified parent. To pass the IRC test and be considered a qualified child, a child must:

  • The taxpayer's son, daughter, stepson, adopted son (placed by an authorized employment agency), or a descendant (for example, a grandchild) of one of them

  • The brother, sister, half-brother, half-sister, half-brother, sister-in-law, or descendant (for example, nephew or niece) of any of them

To pass the IRC age test, the dependent child must:

  • Be under 19 at the end of the fiscal year and younger than the taxpayer (or the taxpayer's spouse, if filing a joint return)

  • Be a full-time student under the age of 24 at the end of the year and younger than the taxpayer (or his or her spouse, if filing a joint return).

The final tests to determine if the person qualifies as a Qualified Child are the Resident Test and the Support Test. To pass the residency test, the child must have lived with the taxpayer for more than half of the year. However, there are exceptions to this rule. For example, suppose the child or the taxpayer is temporarily absent due to illness, study, business, vacation, military service, institutional care for a child with a permanent or total disability, or incarcerated. In that case, the child is always considered to be part of the family (living with the taxpayer) during this period.

The support test requires that the child has not provided more than half of the financial support during the fiscal year.

You may be eligible to file as the head of household, even if the child who is your qualifying person has been abducted. This treatment applies annually until the year in which the child is determined to have died or when the child turns 18 (whichever comes first).


Qualifying Relative

If these tests are not satisfied, the taxpayer may decide to check if the tests are met for a qualifying relative. These tests are slightly different and only apply when testing for a qualified child is not met. Unlike a qualifying child, a qualified relative can be of any age.

A qualifying relative must pass the "not a qualifying child" test, the family member or relationship test, the gross income test, and the child support test. A child cannot be a qualifying relative of a taxpayer if they are the taxpayer's qualifying child (or if they are the qualifying child of any other taxpayer).

To pass the member of household or relationship test, a person must live as a family member of the taxpayer throughout the year or be a relative of the taxpayer. It is important to remember that an adopted child receives the same treatment as a biological child and that any of these relationships established by marriage are not ended in death or divorce.

The dependent's gross income for the year must be less than the cut-off value to meet the dependent's gross income test. That figure changes every year, but for the 2020 tax year, the figure is $ 4,300. Finally, to meet the support test, the taxpayer must have provided more than 50% of the person's total support for the fiscal year. (This support test should be distinguished from that of a qualified child, which assesses whether the child has provided more than half of their support during the year.)

The deduction for individual and dependency exemptions is suspended for the 2018-2025 tax years by the Tax Cuts and Jobs Act (TCJA), adopted in 2017 by President Donald Trump. Although the exemption figure is zero, the capacity to claim a dependent may make taxpayers eligible for other tax benefits.


Special considerations

  • Child or Dependent Care Credit: You will be able to claim a child and dependent care credit if you have paid expenses for the care of a qualifying individual to enable you (and your spouse, if you are filing together) to work or actively seek employment. The amount you receive is a percentage of the amount of work-related expenses you paid to a supplier to take care of a qualifying person. The rate depends on your adjusted gross income.

  • Child Tax Credit (CTC): Taxpayers can claim a Child Tax Credit (CTC) of up to $ 2,000 for each child under 17. The credit is reduced by 5% of adjusted gross income over $ 200,000 ($ 400,000 for couples) for single parents. If the credit exceeds the total amount of tax owed, taxpayers can receive up to $ 1,400 of the balance as a refund, called an additional child credit (ACTC) or refundable CTC.

  • Earned Income Tax Credit (EITC): The Earned Income Tax Credit (EITC) is a refundable tax credit for individuals and couples with low to moderate incomes, especially those with children. The amount of EITC benefit a taxpayer receives depends on their income and the number of children.

  • Education Credits: The two educational credits are American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC). If the taxpayer has a dependent attending a higher education institution, the taxpayer has the right to claim the education credits associated with the dependent. 

The American Opportunity Tax Credit (AOTC) is a credit for qualifying education expenses paid by an eligible student during the first four years of higher education. The Lifetime Learning (LLC) credit is for tuition and related expenses paid by qualified students enrolled in a qualified educational institution.

  • Tax credits for dependents: If the IRC tests determine that you are dependent, you may be entitled to certain tax credits and deductions.


Summary

  • A dependent can be a qualified child or a qualified parent.

  • A dependent is a qualified person, other than the taxpayer or spouse, who gives the taxpayer the right to request a dependency exemption in their tax return.

  • A taxpayer who proves that he/she has a dependent can also use this filing status to qualify to claim certain tax credits.


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