Being certain that the dependent claim requirements are met is critical because dependents can reduce your tax bill. In many cases, you can claim certain tax-cutting deductions and credits related to a dependent.
Even if these added tax breaks do not apply to your situation, a dependent named on your tax return may still assist in realized tax savings. Every dependent directly translates into an exemption-a specific dollar amount deducted from your adjusted gross income.
Not always, but most often, dependent claims revolve around children. One may wonder when, for tax purposes, is a child considered a qualifying child? The primary tax breaks associated with a child are the dependency exemption, head of household filing status, the child tax credit, the child and dependent care credit, and the earned income tax credit. Previously, each of these tax situations had different requirements for how a child could help you qualify for the separate tax breaks.
In an effort to streamline the many rules connected to the various child-related tax benefits, the IRS formulated a uniform definition of a qualifying child. Although there are a few variations, the individual the IRS will actually consider a child for tax purposes is now more consistent.
As is often experienced with changing tax laws, you may find these changes present new challenges. Tax laws are catching up to changes in the world. We now have single parents who have never married living with an adult parent. In other cases, there are divorced parents who share custody and maybe the child lives with one person most of the time, but that parent did not provide the majority of the child’s financial support. Another scenario is one in which the custody arrangement may be split six months each so that there is not a clear-cut time of residency.
In order to address these situations, drafters of tax laws sought to eliminate the support test. With that requirement abolished, taxpayers have more choices when considering child dependency issues and divorced parents are able to decide which adult filer would or should get the tax break.
If a single parent is receiving financial assistance from a parent or lives with a significant other who is providing support, it is no longer an issue that the parent did not provide the majority of the child’s support. The child lived with the parent and residency now overrides support.
In order to claim a child as your dependent to take advantage of child-related tax breaks, the child must now satisfy the following four tests:
1) The Relationship test dictates that the child must be your child, either by birth, adoption or by being placed in your home as a foster child. Even if an adoption is not yet final, if the child is living with you and the process is under way, this counts. A dependent child can also be your brother, sister, stepbrother, stepsister or a descendent of one of these relatives.
2) The Residency test provides that the child must live with you for more than half of the year. This test may present unique challenges for divorced parents where custody and visitation rights may be a constant struggle. If the child is absent temporarily for certain events including, but not limited to, school, vacation, military service, and juvenile detention, these absences are still considered time at home.
3) The Age test provides that a child must be under a certain age, depending on the particular tax benefit. For the dependency exemption, the child must be younger than 19 at the end of the year. However, a youth who was a student at the end of the year can be claimed as long as he or she is younger than 24 years of age. One exception to note is there is no age limit where the individual is permanently and totally disabled.
4) The Support test refers to the child’s own financial contributions. In order to qualify as a dependent, the child cannot provide more than half of his or her own support for the year.
Once a child meets the four qualifying tests, there are two additional tests before that child may be claimed as a dependent for exemption purposes. First, the child must also be a citizen of the U.S., a U.S. National or a resident of the U.S., Canada or Mexico. Second, if married, the child cannot file a joint return unless the return is filed as part of a claim for a refund.
Such as is often the situation with divorced parents, a child can be the qualifying child of more than one person. Since the IRS, however, only allows one taxpayer to claim the same child, all eligible taxpayers, divorced couples especially, will need to decide who will claim the child and any ensuing tax benefits. If divorced parents are not able to agree, and you both list the child on separate returns, the IRS will disallow either one or both of the claims based on the tie-breaker rules.
Under the tie-breaker rules, the IRS looks at whether only one individual is the child’s parent. This would occur if one of the claimants is a stepparent, such as with blended families. The parent would receive the credit. Next, if both taxpayers are the child’s parents, then the parent with whom the child lived the longest during the tax year would be allowed the credit. If the child lived with both separated parents for an identical amount of time, the credit would be used by the parent with the highest adjusted gross income. Finally, if neither person is the child’s parent, the IRS would allow the taxpayer with the highest adjusted gross income to take advantage of the credit.
In most jurisdictions, the primary residential parent or custodial parent is entitled to the dependency exemption unless that parent waives the exemption by use of a properly executed IRS Form 8332 referred to as Release of Claim to Exemption for Child of Divorced or Separated Parents or its equivalent. Unfortunately, most divorce decrees do not contain all the required information and, thus, are not considered the equivalent of Form 8332. In the absence of Form 8332, the exemption and child tax credit can and have actually been disallowed resulting in tax liability with no recourse.
As a final filing consideration, remember to include the Social Security Number of each child claimed as an exemption or dependent on your tax return. Without this number, the IRS will not process your filing and may disallow all claims.
Milandria King is a Senior Attorney in the Memphis, Tennessee office for Cordell & Cordell, P.C., admitted to practice law in the state of Tennessee. Additionally, Ms. King is admitted to practice before the Sixth Circuit Court of Appeals and before the United States District Court for the Western District of Tennessee. Her memberships include the American Bar Association, the Memphis Bar Association, the Tennessee Bar Association, as well as the Association for Women Attorneys.