Posted by UNIVERSAL ACCOUNTING & FINANCIAL SERVICES INC.

Dependents and Taxes

Dependents and Taxes

For tax purposes, a dependent is any other qualifying person asides from the taxpayer or their partner that makes the taxpayer eligible to claim an exemption due to dependency on their return. Provided a taxpayer can prove that they have a dependent, they might claim some tax credits. 


Who is a dependent?

Generally, relatives and kids qualify as dependents. The Internal Revenue Code (IRC) sets the dependency status. There are three criteria the dependent needs to pass to be eligible for this status:

  • Joint return test

  • Dependent taxpayer test

  • Resident or citizen test

If anyone claims another person as a dependent on their tax return, such a dependent cannot claim another person as a dependent on their own return. People filing a joint return (married) cannot claim any dependent. Also, one needs to be an American citizen, resident alien, or national of America. Residents of Mexico and Canada also qualify. 

Also, a dependent can only be claimed by one taxpayer as this is important when two parents have custody of kids. For divorced couples, the dependency claim usually favors the parent with custody. There are, however, cases in which previous court cases might prefer the non-custodial parent. 


Exploring the types of dependents

  1. Qualifying Child

There is some test that a child must meet to be considered qualified, or a relative must meet to be an eligible relative. This is called the IRC relationship test, and the kid must:

  • Be the daughter, son, stepchild, foster kid, or descendant like a grandkid of any taxpayer's parents.

  • Also, the sister, brother, half brother, half-sister, stepsister, stepbrother, or descendant such as nephew and niece of any of the taxpayers.

To qualify for the age test of IRS, the kid must be

  • Below 19 years of age or younger at the end of the tax year. He or she should also be younger than the taxpayer or spouse for those filing jointly.

  • Below 24 years and is a full-time student and must not be the same age mate with either taxpayer. 

The final tests to ascertain the eligibility of the candidate as a qualifying kid are the support and resident test. The kid must have been living with the taxpayer for over six months to qualify for the resident test. However, this rule comes with a couple of exemptions as there are rules when the taxpayer and the kid are separated due to education, illness, military service, business, disability, etc. The kid, during this time, will be considered living with the taxpayer.

The support test means that the kid cannot be responsible for over half of their financial support and care during the tax year. 

The head of household might qualify for this even if the child who makes them qualified is kidnapped. This treatment is valid for all years until it can be proven that the kid is dead or will get to age 18. 

  1. Qualifying Relative 

When the taxpayer cannot meet the tests specified above, they can see if they meet the relative qualifying tests. These are different tests and come to play when the qualifying kid's test fails. A qualifying relative might be of any age, unlike the child. 

Also, a qualifying relative should pass the “not a qualifying child" test, and the relationship test's gross income test. A kid cannot be the qualifying relative of a taxpayer if the kid is the taxpayer's qualifying child. 

In meeting the relative test, the candidate must be related to the taxpayer. Worthy of note is that a kid adopted is considered a biological kid, and a divorce or death cannot end all the marriage relationship.

For the gross income test, the gross income of the dependent for the tax period must be below the threshold value. This value changes every year and was set at $4,300 for the 2020 tax year. In meeting the support test, half of the person's support for the year must come from the taxpayer.


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UNIVERSAL ACCOUNTING & FINANCIAL SERVICES INC.
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