Claiming dependents on a U.S. tax return can result in significant savings and a reduction in the amount of taxes due. In many cases, it can also lead to a generous tax return. However, there are certain rules that must be followed in order to correctly claim dependents.
Who Is Considered a Qualified Dependent?
It’s important to understand what a dependent is. According to the Internal Revenue Service (IRS), a legal dependent is “a person other than the taxpayer or spouse who entitles the taxpayer to claim a dependency exemption.”
In most cases, you can claim a dependent if you have a spouse, partner, child, stepchild, adopted child, foster child, younger sibling, elderly parent, grandparent, in-law or another person who lives in the household and for whom you are financially responsible. In certain situations, someone can claim a non-relative as a dependent. The IRS Publication 501, “Exemptions, Standard Deduction and Filing Information,” explains more complicated determinations of dependent status for cases involving separation, divorce, non-custodial children and more.
To make it easier for citizens to claim dependents, there are a series of qualifying tests that a taxpayer can take to determine the qualifying status of a potential dependent. TaxAct, a company that provides tax software and filing services, provides some basic rules for claiming other types of relative dependents:
The person must be related to the taxpayer or live with the taxpayer as a member of the household all year (with some exceptions).
The person’s total gross income (for the preceding year) cannot exceed $4,050—unless he or she is disabled and earns money through an approved sheltered workshop.
The taxpayer must provide more than half of the individual’s financial support for 12 months.
It is also important to note that a dependent must be a U.S. citizen, either by birth or naturalization.
There can be many benefits to claiming dependents. The primary benefit is the ability to become eligible for tax credits, such as the Earned Income Tax Credit, the Child and Dependent Care Credit, the Child Tax Credit and others.
These credits can reduce tax liability by thousands of dollars, which can drop taxpayers down into lower earning brackets. This is far better than claiming deductions, which do not yield the amount of savings that credits do. In the case of low-income parents, the tax return can be generous and help them pay off debts, offset the cost of providing health insurance benefits or save up money to pay for dependents’ future needs, like college tuition.
Claiming dependents can also have potentially negative impacts. If another taxpayer also attempts to claim the same dependent (like in the case of a child custody issue) or if one parent claims the dependent and the other parent also attempts to claim the dependent, this can hold up tax processing.
Another potential issue is if the dependent works and earns over the allowable amount. The dependent may be eligible to file their own taxes, and the supporting parent or guardian will not be reimbursed for money they spend to care for the individual.
Before claiming any dependents on taxes, it’s important to speak with a qualified accountant who’s knowledgeable about the IRS dependency laws in your state. There may be other credits and benefits that could help your particular tax status.