Income taxes can be very complex. However, much of what makes the tax code seem so complicated is that in order to prevent ambiguity and unintended uses of tax laws, the Internal Revenue Service (IRS) must specifically define not only each rule, but terms used within those rules. A common term on most income tax forms is "dependents," and numerous tax deductions and credits depend upon the number of dependents you have.
The IRS defines a dependent as a qualifying child or a qualifying relative who you partially or fully support economically.There is a seven-part test for determining whether a child qualifies as a dependent and there is a different seven-part test for determining whether a person is a qualifying relative.
Qualifying Child Test
There are seven criteria that must be met for a person to be a qualifying child.
First, the child must be related. To meet the relationship test, the child must be a biological son or daughter, a stepchild, a foster child or a descendant of one of them. In other words, grandchildren by biological children, step children and foster children can count. Additionally, the taxpayer's brother, sister, half brother or sister, stepbrother or stepsister, and the descendants of any of them qualify for purposes of the relationship test.
Second, the child must also be under age 19 at the end of the year and be younger than the taxpayer or their spouse, if filing jointly. However, full-time students may be considered dependents up to age 24. Also, any person who is permanently and totally disabled at any time during the year may be considered a dependent, regardless of age.
Third, the child must also have lived with the taxpayer for more than half of the year. There are exceptions for certain situation, including children who were born or who died during the year, and those who were kidnapped. Also, children of divorced or separated parents are an exception if a court ruling has been issued that counts the child as a dependent of one of the parents.
Fourth, the child cannot have provided more than half of their own support for the year.
Fifth, the child cannot file his own taxes with joint status.
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Sixth, the child must be a United States citizen or national or a resident of the U.S., Canada or Mexico.
Lastly, regardless of how the child meets the above criteria for any taxpayer, a child may be claimed as a dependent on only one tax return.
Qualifying Relative Test
In order to be a qualifying relative, a person must meet four criteria.
First, the person cannot be a qualifying child for you or any other taxpayer.
Second, the person must be a member of the taxpayer's household or be related to the taxpayer in a way allowed under IRS Publication 501. To be considered a member of the household, the dependent must have lived with you all year. Otherwise, they must be your child, stepchild, foster child or descendant of any of them. Additionally, your brother, sister, half brother or sister, stepbrother or stepsister, father, mother, grandparent, great-grandparent (including great-great and any other further great-plus-grandparent), stepfather or stepmother qualify. Descendants of these do not count and foster parents are specifically excluded. Also, nephews, nieces, uncles, aunts and certain in-laws (son, daughter, father, mother, brother or sister) qualify, provided that the relationship was established by marriage and that the marriage did not end by death or divorce.
Third, the person must have a gross income of less than $3,800.
Fourth, the person must be a United States citizen or national or a resident of the U.S., Canada or Mexico.
Fifth, the person cannot file his own taxes with joint status.
Sixth, the person cannot be claimed as a dependent on someone else's tax return.
Lastly, the taxpayer must have provided more than half of the person's total support during the year.
As noted in the qualifying child test, children of divorced parents may sometimes be claimed on a parent's taxes even if they did not meet the residency or support tests. Some divorce decrees specifically assign the ability to claim the child as a dependent as part of the proceedings. Some decrees even set up a schedule of who gets to claim the dependent. In any case, only one parent may claim the child as a dependent in any one year.
The purpose of counting the number of dependents a person has is to help determine what kind of responsibilities a particular taxpayer has. The tax code is used to reward not just families, but also to reward taxpayers who take care of family members who they might not traditionally be required to care for. Many deductions and credits are available only to those with a certain number of dependents, while the income limitations on other deductions or credits are adjusted upward based upon having more dependents.
Every dependent claimed gets a standard deduction that reduces the taxes paid. In addition, certain dependents may qualify for additional tax credits such as the Child Tax Credit. Also, certain expenses of dependents may be deducted in whole or in part, such as child care expenses, education expenses and medical expenses.
The most common deduction taken on federal income taxes is that for dependents. In addition, numerous other tax deductions and tax credits are calculated based upon how many dependents a taxpayer has.