Federal Income Tax – Dependency Exemption
Posted on April 19th, 2016
The dependency exemption is a deduction of longstanding in the Internal Revenue Code. For 2017 the deduction for each dependency exemption is $4,050.
Two categories of people qualify to be claimed as dependents: Qualifying Children and Qualifying Relatives. Read the definitions below and you will find that “Qualifying Child” includes brothers and sisters and nephews and nieces and stepchildren and children of stepchildren as well as children and their descendants, and “Qualifying Relatives” includes people who live with the taxpayer whether or not they are related.
Five tests must be met in order to claim a dependency exemption:
- The taxpayer must provide more than one-half of the individual’s support.
- The individual is a relative or a member of the taxpayer’s household
- The individual earns less than the current year’s exemption amount (This test is no longer applied to taxpayer’s children).
- Individuals cannot be treated as dependents if required to file a joint return with their spouses.
- The individual is either a citizen or resident of the United States, or a resident of a country contiguous to the United States.
A Qualifying child must meet the following tests:
- Relationship: The individual must be a child of the taxpayer or a descendant of such a child, or a brother, sister, stepbrother, or stepsister of the taxpayer, or a descendant of any such relative. Adopted children or foster children placed by an authorized placement agency or by judgment, decree or court order are treated as natural born children.
- Age: The individual must, at the end of the taxable year, be under 19 (under 24 if a full time student), or permanently and totally disabled.
- Domicile: The individual must have the same principal place of abode as the taxpayer for more than half of the year (not counting absences because of illness, education, business, vacation, or military service).
- Support: The individual cannot provide more than half of his or her own support.
- Citizenship/Residency: The individual must be either a citizen or resident of the United States or a resident of a country contiguous to the United States.
Child of Divorce Parents:
A child of divorce parents (including parents separated under a written separation agreement, or living apart at all times during the last six months of the tax year) is claimed as a dependent by the custodial parent (the parent having custody for the greatest period) unless that parent signs a statement releasing the exemption to the non-custodial parent and the non-custodial parent attaches the statement to his or her tax return. IRS has designed Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, to be used for releasing the exemption to the non-custodial parent.
If a child qualifies as a dependent of multiple taxpayers, the taxpayers can agree as to who will claim the exemption. If more than one person claims a qualifying child as a dependent, tiebreaker rules determine who will get the exemption: If one of the taxpayers is the individual’s parent, the parent gets to take the exemption. If both taxpayers claiming the child are its parents, then the parent with whom the child lived for the longest period during the year. If neither taxpayer is the child’s parent, or if the child lived an equal time with each parent, the taxpayer with the highest Adjusted Gross Income is entitled to the exemption.
A Qualifying Relative is any of the following:
- A child or a descendant of a child.
- A brother, sister, stepbrother, or stepsister.
- The father or mother, or an ancestor of either.
- A stepfather or stepmother.
- A son or daughter of a brother or sister of the taxpayer.
- A brother or sister of the father or mother of the taxpayer.
- A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
- An individual who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household.
If a child fails the test to be claimed as a child, he may still qualify to be claimed as Qualifying Relative (an unemployed child over age 19, for instance).
Note that a person who is a member of the taxpayer’s household for the entire year will be a “Qualifying Relative” whether or not related to the taxpayer.
Multiple Support Agreements:
A group of taxpayers who jointly provide more than one-half of the support a Qualifying Relative are allowed to agree on which of them will claim the dependency exemption on the following conditions:
- If no one person contributed more than half of the individual’s support.
- Each member of the group that provided more than one-half of the individual’s support would have been able to claim the individual as a dependent except for the fact that his contribution was less than one-half of the individual’s support.
- The claiming taxpayer must have contributed more than 10% of the individual’s support.
- Each member of the group who contributes more than 10% of the individual’s support signs a written declaration that he will not claim the individual as a dependent for the year in question.
The Taxpayer claiming the exemption attaches Form 212—Multiple Support Declaration to his tax return naming and providing taxpayer identification numbers for the other members of the group providing support, and declaring that he has the a written declaration from each that he or she will not claim the individual as a dependent for the year in question. The taxpayer is required to produce the declarations if audited.
Head of Household:
Taxpayers providing homes for certain dependents are allowed to claim Head of Household filing status, which give them the benefit of tax rates lower than those of a single person (but not as low as people filing joint returns).
Under the current law a taxpayer can claim Head of Household status if he pays more than one-half of the costs of maintaining a household which is the principal place of abode for more than one-half of the year for a Qualifying Child (whether or not such child can be claimed as a dependent), or an individual (Qualified Relative) for whom the taxpayer may claim a dependency exemption.
(Under a separate provision, if a taxpayer pays more than half of the support of his parent, he may claim the dependency exemption for the parent and claim Head of Household status even if the parent does not live with the taxpayer.)
Deduction Phaseout for High Income Taxpayers:
The deduction for dependents phases out in 2016 for taxpayers with over $259,400 in income ($311,300 for joint filers).