There are important rules regarding who qualifies as a dependent for federal income tax purposes. For the 2014 tax year, the dependent exemption amount is $3,950. Each year, the deduction typically goes up $50 to $150, based on a required inflation adjustment.
A qualifying child for purposes of the dependency exemption must satisfy four tests relating to relationship, age, abode, and support.
Qualifying children must be the taxpayer’s children, siblings, stepsiblings, or their descendants. Children include the taxpayer’s natural children, stepchildren, legally adopted children, children who are lawfully placed in the taxpayer’s household for legal adoption, and eligible foster children (that is, children placed with the taxpayer by an authorized placement agency or court order). Brothers and sisters include half-brothers and half-sisters.
A qualifying child must have the same principal place of abode as the taxpayer for more than one-half of the taxpayer’s tax year.
As of the close of the calendar year in which the taxpayer’s tax year begins, a qualifying child must be under 19 years old; a student under 24 years old; or permanently and totally disabled.
A qualifying child must not have provided more than one-half of his or her own support during the calendar year in which the taxpayer’s tax year begins.
Special tiebreaker rules apply when a single individual is a qualifying child for multiple taxpayers. If only one of the taxpayers is the child’s parent, the child is a qualifying child for that parent. If two of the taxpayers are the child’s parents and they do not file a joint return, the child is a qualifying child for the parent with whom the child resided for the longest period during the year; if the child spent equal amounts of time residing with each parent, the child is a qualifying child for the parent with the highest adjusted gross income (“AGI”). If none of the taxpayers is the child’s parent, the child is a qualifying child for the taxpayer with the highest AGI.
There are two elements to the definition of a “qualifying-child.”
- The age test is expanded to require that a qualifying child must be younger than the taxpayer.
- A new test is added with respect to joint returns. A qualifying child cannot file a joint return with a spouse for any tax year beginning during the calendar year in which the taxpayer’s tax year begins.
However, this test does not apply if the qualifying child files a joint return only to obtain a refund.
There are two clarifications to the tiebreaker rules that apply when a single individual is a qualifying child for more than one taxpayer. First, the law clarifies that the tie-breaker rules apply whenever two or more taxpayers can claim the individual as a qualifying child, regardless of whether they actually do so. Second, if the parents can claim an individual as a qualifying child, but neither parent does so, another taxpayer may claim the individual as a qualifying child only if that taxpayer’s AGI is higher than the highest AGI of any of the individual’s parents.
Finally, the rules require that a qualifying child for purposes of the child tax credit must also be the taxpayer’s dependent.
The “qualifying relative” route to a dependency exemption is increasingly used by adult children supporting their elderly parents. But this “qualifying relative” dependency exemption is not limited to those circumstances. A taxpayer may be able to claim a dependency exemption for other qualified relatives, which include the taxpayer’s: children and their descendants; siblings and their children; stepsiblings; parents and their ancestors; stepparents; aunts and uncles; and in-laws, including son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, and sister-in-law.
In addition to having one of these relationships, however, a qualifying relative must also meet the following requirements:
- The relative’s total gross income for the calendar year in which the taxpayer’s tax year begins must be less than the exemption amount ($3,950 for 2014);
- The taxpayer must provide over half of the relative’s support for the calendar year in which such tax year begins; and
- The relative must not be a qualifying child of the taxpayer or any other taxpayer for any tax year beginning in the calendar year in which such tax year begins.
A married child who files a joint return with a spouse during the relevant tax year cannot be a qualified child or a qualified relative.
Dependency Exemption and Divorced Parents
In the case of divorced parents, special rules determine which parent may claim a dependency exemption. A child may be treated as a qualifying child of the noncustodial parent if, among other requirements, the custodial parent releases the claim to the exemption for the child and the noncustodial parent attaches the release to the return. The IRS has developed Form 8332 for this purpose. Taxpayers may use an equivalent document if it meets the requisite requirements.
Personal Exemption Phaseout
Exemptions are subtracted from an individual’s AGI to arrive at his or her taxable income. An individual is entitled to one personal exemption plus an exemption for his or her spouse if filing a joint return. An exemption is also allowed for each qualified dependent. The number of the taxpayer’s exemptions is multiplied by the exemption amount (adjusted annually for inflation) to determine how much is subtracted from the taxpayer’s AGI in computing taxable income. Higher income taxpayers are subject to a personal exemption phaseout (PEP).
The PEP rules apply to higher income taxpayers with AGI in 2014 above the following thresholds:
- $305,050 for married couples and surviving spouses;
- $279,650 for heads of households;
- $254,200 for unmarried taxpayers; and
- $152,525 for married taxpayers filing separately.
Under PEP, the total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500, or fraction thereof (two percent for each $1,250 for married couples filing separate returns) by which the taxpayer’s adjusted gross income exceeds the applicable threshold level.