Note: A new tax law signed into law on December 22, 2017 will create several changes for individual taxpayers. One of these changes is the repeal of the personal and dependency exemptions. The change will take effect for tax year 2018. It will last until tax year 2025 unless Congress acts to extend it. See How Will The New Tax Law Impact Individual Taxpayers for more information.
For income tax purposes, dependents are generally individuals who count on someone else for most of their financial support. Those who depend on you are most commonly your children. However, parents, relatives, and others may also be your dependents. Having individuals depend on you financially can get very expensive. As such, the government created the “dependency exemption.”
The dependency exemption is essentially a tax deduction which allows you to reduce your taxable income by the amount of the exemption. You are allowed a dependency exemption for each dependent you claim on your tax return. For higher income taxpayers, the exemption may be phased out.
But the dependency exemption is not the only tax break you can receive to help you support your dependents. You may also be able to claim other tax breaks if you have dependents. Filing status, as well as certain deductions and credits may depend at least partly on claiming dependents.
Who Can You Claim as a Dependent on Your Tax Return?
So claiming someone as a dependent on your tax return may help you recoup some of the costs of supporting this individual. But you can’t just claim anyone you support financially as a dependent on your tax return. As you might expect, there are specific criteria which must be met. A dependent claimed on your tax return must be either a “qualifying child” or a “qualifying relative.”
The following tests must be met in order to claim someone as a qualifying child:
Joint Return Test
You cannot claim an individual who is married as a dependent if they file a joint tax return. However, if the joint tax return is only filed for the purpose of claiming a tax refund of withheld income tax or estimates paid, then this test will have been met.
Citizen or Resident Test
In order to claim someone as a dependent, the individual must be a U.S. citizen or resident alien, or a resident of Canada or Mexico. A child adopted legally by a U.S. citizen meets the test if they lived with you all year.
The relationship test is relatively broad. The child can be your child, stepchild, foster child, adopted child, sibling, half-sibling, step-sibling, or a descendant of any of them, such as a grandchild or niece or nephew.
The child must be under age 19 at the end of the tax year. However, the child may be up to 23 years old by year end if he or she is also a full-time student. In either case, the child must also be younger than you (or your spouse if filing jointly).
To be considered full-time, a student must be enrolled in the number courses a school considers full-time for at least five months of the year. Schools offering courses online only do not qualify.
This test may also be met if the child is any age, but is permanently and totally disabled at any time of the year.
The child must have lived with you for more than half the year. Temporary absences by you or the child such as those due to illness, education (i.e., college), business, vacation, military service, or incarceration count as time living together.
If a child was born or died during the year, the residency test will have been met as long as the child lived with you for more than half the year while alive.
There is an exception to the residency test for children of divorced or separated parents or parents who live apart. This special rule states the conditions under which the noncustodial parent may be able to meet this test. See IRS form 8332 and its instructions for more information.
In order to meet this test, a child cannot provide more than half of his or her own financial support during the year. The child’s own funds are not counted as support unless actually spent for that purpose.
A worksheet is provided by the IRS which can help you to determine if the support test is met for a potential dependent.
To be a qualifying relative, an individual must meet some of the same tests as a qualifying child, but there are some differences as well.
Not A Qualifying Child Test
In order to be a qualifying relative, an individual cannot also be your qualifying child, or the qualifying child of another taxpayer. An exception exists for this rule if the other taxpayer is not required to file an income tax return and doesn’t file, or only files to claim a refund of income tax withheld or estimated tax paid.
Member of Household OR Relationship Test
The qualifying relative must either live in your household the entire year or must be related to you (in one of the ways listed below). So a “qualifying relative” dependent does not necessarily have to be your relative as long as they were a member of your household the entire year.
With regard to the member of household test, temporary absences for education, illness, vacation, etc. still count as time living in the same household.
The relationship test is very broad. The qualifying relative may be your child, stepchild, foster child, or any of their descendants. Your sibling, half-sibling, step-sibling, parent, grandparent, other direct ancestor (but not a foster parent), stepparent, nephew or niece (child of your sibling), aunt or uncle (sibling of your parent), child-in-law, parent-in-law, and sibling-in-law are also acceptable relationships for this purpose.
Note that cousins are not included above. So a cousin would have to be a member of your household all year to meet this test. Also note that any relationships above established by marriage do not end for this purpose due to death or divorce.
A dependency exemption is not allowed for a housekeeper or other household employee.
Gross Income Test
A qualifying relative’s income for the tax year must be less than the personal exemption amount for that same year. Gross income includes all money, property, and services received which are not exempt from income tax.
You must provide more than half of the qualifying relative’s support for the tax year. Note that this test is different from the support test for a qualifying child.
You can use the worksheet provided by the IRS to help you determine if you meet this test.
If no one provided more than half the support of an individual, a multiple support situation may exist. This means that two or more taxpayer’s who could otherwise claim the dependent as a qualifying relative, provide more than half of that person’s support. Any such taxpayers who provide more than ten percent of an individual’s total support may agree that one of them will claim the dependency exemption.
If you are the one claiming the dependency exemption under a multiple support agreement, you must file IRS form 2120 with your tax return. The other taxpayers paying over 10% of the support must each provide to you a written and signed statement agreeing not to claim the exemption for the year. Such statements should be kept for your records, and should not be sent in with your tax return. See the IRS form 2120 instructions for more information.
There is a special rule which provides an exception to the support test for children of divorced or separated parents. Under this rule, the support test may be met as long as the child received more than half of his or her support from one or both parents. However, other conditions also apply. See IRS form 8332 and its instructions for more information.
Joint Return Test
Same as that for a qualifying child (see above).
Citizen or Resident Test
Same as that for a qualifying child (see above).
Other Key Points To Note When Claiming Dependents
- An individual can only be claimed as a dependent on one tax return.
- If more than one person is eligible to claim a qualifying child as a dependent, the “tiebreaker” rules apply.
- If you or your spouse (if married filing jointly) can be claimed as a dependent by someone else for the year, then you cannot claim any dependents on your own tax return.
- Also, your spouse cannot be your dependent. However, you can claim a “personal exemption” for yourself and your spouse (if filing jointly) as long as you can’t be claimed as dependents by another taxpayer. A personal exemption is worth as much as a dependency exemption.
- You may also be able to claim a personal exemption for your spouse if filing separately. But only if he or she has no gross income, is not filing a joint return, and was not the dependent of another.
- The dependency exemption for tax year 2017 is $4,050 for each dependent you claim.
- The dollar amount of the dependency exemptions claimed on your tax return is reduced if your adjusted gross income (AGI) exceeds certain levels. These levels are $259,400 for single taxpayers, $311,300 for those filing jointly, and $285,350 for head of household. The dollar amount of your exemptions is reduced by 2% for each $2,500 (or part thereof) that your AGI exceeds these thresholds.
Knowing who you can claim as a dependent is very important when it comes to determining your tax liability. Besides the tax savings that can result from dependency exemptions, claiming a dependent may also benefit you in other areas of your tax return.
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