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  5. The Dirty Dozen: 12 Tricky Tax Dependent Dilemmas

The Dirty Dozen: 12 Tricky Tax Dependent Dilemmas

Updated for Tax Year 2021 / July 25, 2021 03:24 PM


OVERVIEW

Knowing when someone qualifies as a tax dependent can be trickier than it seems. These 12 examples help clear up the confusion about who you can and can't claim as a dependent on your tax return.


For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.


 

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Claiming dependents on your tax return can make a big difference in what you pay in taxes (or how big a refund you get).

Stimulus impact on the Child Tax Credit for 2021

Child Tax Credit Changes

The American Rescue Plan raised the maximum Child Tax Credit in 2021 to $3,600 for qualifying children under the age of 6 and to $3,000 per child for qualifying children ages 6 through 17. Before 2021, the credit was worth up to $2,000 per eligible child, and 17 year-olds were not eligible for the credit.

The Child Tax Credit changes for 2021 have lower income limits than the original Child Tax Credit. Families that do not qualify for the credit using the revised income limits are still eligible for the $2,000 per-child credit using the original Child Tax Credit income and phase-out amounts.

In addition, the entire credit is fully refundable for 2021. This means that eligible families can get it, even if they owe no federal income tax.

New, Temporary Advance Child Tax Credit Payments

The Child Tax Credit has been expanded by the American Rescue Plan Act, that was enacted in March of 2021. Part of this expansion is to advance the 2021 tax credit to families by sending them direct payments during 2021 rather than having them wait until they prepare their 2021 taxes in 2022. Most families do not need to do anything to get their advance payment. Normally, the IRS will calculate the payment amount based on your tax return. Eligible families will receive advance payments, either by direct deposit or check.

The amount that you receive will be reconciled to the amount that you are eligible for when you prepare your 2021. Most families will receive about one-half of their tax credit through the advance payments. If you receive too little, you will be due an additional amount on your tax return. In the unlikely event that you receive too much, you might have to pay the excess back, depending on your income level.

For updates and more information, please visit our 2021 Child Tax Credit blog post.

For tax years 2018 through 2020, claiming dependents no longer provides for an exemption of any income from taxation. However, each dependent that qualifies for the child tax credit will reduce your taxes by $2,000 and those that don't can reduce your taxes by $500 each.

For tax years prior to 2018, each child can you claim as a dependent provides an exemption that reduces your taxable income. The amount was $4,050 for 2017. This could save you more than a $1,000 in the 25% tax bracket. But children aren't the only ones you can claim as dependents.

Despite attempts by the IRS to clarify whether or not someone qualifies as a dependent, today's complex living arrangements often raise questions as to just whom can be claimed on your tax return. There are now two classes of people who can qualify as dependents:

  • Qualifying children
  • Qualifying relatives

See how the IRS defines dependents here. The following Q&As can also help clear up the confusion about who can and cannot be claimed as a dependent.

Birth of a child

The rules say a qualifying child must live with you for more than half the year. My daughter was born in October. Does that mean I have to wait until next year to claim her?

A. No. Even a child born on December 31 qualifies as a dependent. The same rule applies if a child dies during the year. A child who is born and/or dies during the year is treated as having lived with you all year long. Check out this article for more tips.

Living together I

Q. My girlfriend and I live together. She doesn’t have a job, so I pay for the rent and all the groceries. Can I claim her as my dependent?

A. Perhaps, if she meets the requirements for a qualifying relative. That means you must have lived together all year long, her gross income must be less than the annual limit, and you must have provided more than half of her support. This income limit is $4,300 for 2020 and 2021 but is adjusted for inflation in other years. One other test: Your living arrangements must not violate local law. The IRS notes, for example, that some states prohibit couples from living together if one party is married to someone else. In such a case, the IRS says, a dependency claim would be disallowed even if the other requirements are met.

Living together II

Q. My girlfriend and her two-year-old son live with me and I basically pay all the expenses. Can I claim both of them as my dependents?

A. Yes, if they meet all the IRS requirements for dependents. Did they live with you all year long? Did you provide more than half of their support? Did both of them have gross income of less than $4,300 in 2020 or 2021? If you can answer YES to all three questions, then you may claim both your girlfriend and her son as your dependents. (This assumes your living arrangements don’t violate local law. See above.) Until recently, in this situation the boyfriend could not claim the child as a qualifying relative because the child was considered a qualifying child of the mother. However, the IRS now says if the parent’s income is so low that he or she doesn’t have to file a tax return, then the boyfriend who lives with the mother and child all year long can claim the mother and the child as dependents.

Boomerang children I

Q. After our 28-year-old daughter’s divorce, she and her two young children moved back in with me and my wife. Can we claim all three of them as dependents on our tax return?

A. The answer depends on how much money your daughter made during the year. If she made less than $4,300 and you provided more than half of her support for the year, then she can be claimed as your dependent as a qualifying relative. The same rules apply to your grandchildren. If your daughter made more than $4,300 in 2020 and 2021, she doesn’t qualify as your dependent, but the grandkids might because they can be qualifying children for both you and your daughter. If your daughter agrees to let you claim the children as your dependents, and her Adjusted Gross Income (AGI) is less than yours —assuming doing so will save the family money if you have more taxable income—then you may claim them. In that case, of course, your daughter could not claim them. If your daughter's AGI is greater than yours, then she can claim the grandchildren but you cannot.

Boomerang children II

Q. Our 25-year-old son is back home after completing his college degree. He has a pretty good job, so he makes too much for us to claim him as a dependent. However, we’ve heard that there’s a way he can claim his 16-year-old sister as a dependent, since we all live together in the same house. Is that really possible?

A. The answer is maybe—depending on your income and your son's. In order for your son to claim his sister as a dependent, his adjusted gross income (AGI) must be higher than any parent who could also claim her as a dependent, regardless of whether you choose to claim her or not. This is called a "tiebreaker" rule, which helps determine who, if anyone, can claim a dependent. Remember, only one person can claim the dependent in any given tax year.

In addition, your 16-year-old daughter would also have to meet the all of the other qualifications for being her brother's dependent (living with her brother more than half the year, not providing more than half of her own support, etc.). For the full list of qualifications, see Rules for Claiming a Dependent.

Children of divorced parents

Q. My divorce was final last year, and the three kids live with me. Now my ex says that since he’s paying child support, he’s going to claim them as dependents on his return. He says that means I can’t claim them on mine. Is that true?

A. Not likely. The general rule for qualifying children demands that the child live with you more than half the year and therefore children of divorced parents are usually dependents of the custodial parent. There are exceptions. The custodial parent can release the dependency claim (or perhaps be forced to do so by the court) to his or her ex-spouse by signing a written declaration (Form 8332) that the noncustodial spouse must attach to the tax return each year he or she claims the children as dependents. Otherwise, you get to claim the children as your dependents. If your ex-spouse claims them, too, the IRS will step in and likely deny his claim. Also read What Happens When Both Parents Claim a Child on a Tax Return for more information on this topic.

Adult child in need

Q. Our 30-year-old son has fallen on hard times. Because he lost his job, my spouse and I are basically supporting him, paying rent on his apartment and sending him money for food. Can we claim him as a dependent?

A. Although he’s too old to be your qualifying child, he may qualify as a qualifying relative if he earned less than $4,300 in 2020 or 2021. If that’s the case and you provided more than half of his support during the year, you may claim him as a dependent.

Elderly parent

Q. My 83-year-old mother moved in with me when she could no longer live alone. Her only income is her Social Security, so she doesn’t have to file a tax return. Can I claim her as my dependent?

A. Yes, assuming you provide more than half of her support, she can pass the test as a qualifying relative. Tax-free Social Security benefits don’t count as gross income for the $4,300 test in 2020 or 2021. When figuring that portion of her support you provide, include a value for the housing you provide. If someone else helps support your mother—one of your brothers or sisters, for example—and your combined support passes the 50% threshold, you may claim your mother as a dependent if you file a Form 2120: Multiple Support Agreement. Also read Steps to Claiming an Elderly Parent as a Dependent for more tips.

Child with scholarship

Q. My daughter won a full-ride scholarship to an expensive college. I’m thrilled, but I think the value of the tuition is more than what it costs me to feed and clothe the young scholar. If I don’t provide more than half of her support, do I lose her as a dependent?

A. Don’t worry. First, scholarships are specifically excluded when figuring support. And remember, the test for a qualifying child is no longer that you provide more than half the support, but that she does not provide more than half of her own support. You can still claim her, assuming she’s under age 24 and a full time student for at least 5 months of the year.

Child of separated parents

Q. My wife and I separated at the end of September. Our 15-year-old son lived with me in October and with his mother the rest of the year. We’ll be filing married-filing-separate returns this year. Who gets to claim our son as a dependent?

A. It’s up to you and your wife. You might decide that the parent who gets the biggest tax benefit (the one in the higher tax bracket) should claim the child. If you can’t agree, however, the dependency claim goes to your wife because your son lived with her for more of the year than he lived with you.

Unmarried parents

Q. My boyfriend and I live together with our 3-year-old son. Since we’re not married, we can’t file a joint return. Which one of us gets to claim our son as a dependent

A. It’s up to you. Since he qualifies as a qualifying child for each of you, either parent may claim the child as a dependent. If you can’t decide, the dependency claim goes to whichever of you reports the higher Adjusted Gross Income on your separate tax return.

Child receives inheritance

Q. Our 17-year-old received a $100,000 inheritance from his uncle last year. Does that mean we can’t claim him as a dependent on our tax return?

A. Not unless he splurged on an expensive car, a lavish trip, or otherwise spent a lot of the money on his own behalf. When it comes to the qualifying child tests, it doesn’t matter how much money a child receives during the year (from work, a gift or inheritance). What matters is if he provides more than half of his own support. Any money he saved doesn’t count toward going toward his support, so you can probably still claim him as your dependent.

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