Be Prepared: Dependents
/DISCLAIMER: These articles are based on the tax requirements for 2020. Tax requirements change frequently, so future requirements may be different. This article and future articles on this subject are not tax advice, they are meant to help you to know what documentation to prepare when submitting your information to your tax preparer. Always check with your tax preparer for the proper documentation required for that year, and for any specific tax advice.
Be Prepared (Part 3):
Dependents
As the title suggests, being prepared to do your taxes is important, as it can save you time. It can also save you money. The organized documentation you give to your tax preparer, even if you do your own taxes will make the work go faster and it will enable the correct calculation of your tax or refund. No sense paying too much, or getting a smaller refund than you deserve.
Key Terms that will be used in this and other articles:
Dependent
Any individual who can be claimed on a tax return by you, the taxpayer, in order to receive a deduction.
Qualifying Child
A child under the care of you, the taxpayer, who can be claimed as a dependent, provided that specific criteria are met.
Qualifying Relative
A relative under the care of you, the taxpayer, who can be claimed as a dependent, provided that specific criteria are met.
Deductions
Think of deductions like expenses. Deductions are removed from your income, and then the appropriate tax rate is applied to the difference between your income and your deductions.
Standard Deduction
Each filing status is given a predetermined deduction called the standard deduction. Any deductions over the standard amount can be used to further reduce your taxable income. If you the taxpayer do not have more deductions than the standard amount, then the standard is used by default.
Exemption
A circumstance that meets certain criteria, which can reduce or eliminate certain payment requirements.
Income
The wages, interest, dividends, and other sources of money you receive during the year.
Claiming Dependents
In the last post, we covered standard deductions. Next on the 1040 form, after standard deductions, is the section for dependents. Claiming dependents on your tax return can save you varying amounts depending on your tax bracket (that is, the level of income that is actually taxed). For example, at the 15% tax level, you can save about $600; At the 25% tax level, you can save a little over $1,000.
There are two types of dependents:
A qualifying child
A qualifying relative
Qualifying Child
To claim an exemption for your child, you must be able to answer "yes" to all the following questions:
Are they related to you?
The child can be your son, daughter, stepchild, eligible foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, adopted child or an offspring of any of them.
Do they meet the age requirement?
A qualifying child must be under age 19 or, if a full-time student, under age 24. There is no age limit if your child has a permanent and total disability. Medical documentation of said disability would be needed.
Do they live with you?
Your child must live with you for more than half the year. If the child lives with you, but you give the deduction to the other parent with whom the child does not live, you must file Form 8332, Release of Claim to Exemption. By completing Form 8332, the person with custody of the child would indicate that they wish to release their claim to a dependency exemption for the child on the form for the tax year indicated.
Do you financially support them?
Your child may have a job, but that job cannot provide more than half of their financial support. Records showing the child’s income and whether that would provide for more than half their support would be needed.
Are you the only person claiming them?
This requirement commonly applies to children of divorced parents. Here you must use the “tiebreaker rules,” which are found in IRS Publication 501. These rules establish income, parentage, and residency requirements for claiming a child. All three of these items would need to be documented. The tiebreaker rule is as follows:
If the child's parents don't file a joint return together, but both parents claim the child as a qualifying child, the IRS will treat the child as the qualifying child of the parent with whom the child lived for a longer period of time during the year. If the child lived with each parent for the same amount of time, the IRS will treat the child as the qualifying child of the parent who had the higher adjusted gross income (AGI) for the year. The parent that qualifies would have to provide documentation for either time period, that is possibly school attendance address, or showing the highest income between the two parents.
Qualifying Relative
Many people provide support to their aging parents. But, just because you mail your 78-year-old mother a check occasionally, doesn’t mean you can claim her as a dependent; there are certain criteria they must meet in order to qualify. Here is a checklist for determining whether a relative qualifies to be claimed as a dependent:
Do they live with you?
Your relative must live at your residence all year, or be on the list of “relatives who do not live with you” in Publication 501. About 30 types of relatives are on this list, including, for example:
Children (including legally adopted), stepchildren, foster children, or any of their descendants (i.e. grandchildren).
Siblings, including half and step siblings;
Parents and their direct ancestors (for example, great grandparents), but excluding foster parents.
Stepparents
Aunts and uncles, nieces and nephews
Fathers-in-law, mothers-in-law, sons-in-law, daughters-in-law, brothers-in-law, and sisters-in-law
You can claim as a dependent anyone who fits any of the above relationships that were established by marriage and not ended by divorce or death. Evidence supporting any of these would be required, for example birth certificates or genealogy documentation.
Do they make less than $4,300 in 2020 or 2021?
Your relative cannot have a gross income of more than $4,300 in 2020 or 2021. If they do, they cannot be claimed by you as a dependent. Income earned documentation would be needed.
Do you support them financially?
You must provide more than half of your relative’s total support each year if they make less that $4,300. It's either one or the other.
If they make over $4,300 you cannot claim them; under $4,300, and you can claim them if you provide more than half of their finances. You must show records that show that financial support, for example, documenting medical and living expenses.
Are you the only person claiming them?
This means that the same person cannot be claimed twice (i.e. once as a qualifying relative and again as a qualifying child). It also means you can’t claim a relative—a cousin, for example—if someone else, such as their parents is already claiming them. If the IRS finds a duplicate claim, the deduction would be eliminated for at least one, or both, and there could be penalties and fines.
The social security number (SSN) of the dependent would clue the IRS to a duplicate claim as the IRS does a SSN check on all dependents. The best way to avoid duplication is to have clear communication with the other possible parties that could claim the person.
Additional Qualifications
For both types of dependents, in addition to the qualifications above, you’ll need to answer the following questions to determine if you can claim them:
Are they a U.S. citizen or resident?
The person must be a U.S. citizen, a U.S. national, U.S. resident, or a resident of Canada or Mexico. Many people wonder if they can claim a foreign exchange student who temporarily lives with them. The answer is maybe, but only if they meet this residency requirement which for a foreign exchange student is a full year or has a green card. Documentation would be needed to show the student has lived at a place for the required period, or the green card would be needed.
Are you the only person claiming this person as a dependent?
You can’t claim someone who takes a personal exemption for themselves, or claims another dependent on their own tax form. Both conditions involve the dependent filing their own tax return; if they do not not take a personal exemption for themselves, claim another dependent, or file their own tax return at all, you may claim this person as a dependent.
Are they filing a joint return?
You cannot claim as a dependent someone who is married and files a joint tax return. Say, for example, you support your 19-year-old child who is also married—if this child files a joint return with their spouse, you can’t claim that child as a dependent.
Stay tuned for Part 4 of our “Be Prepared” series on tax preparation.
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A checklist of common documents related to deductions and credits that you will need when preparing to file your taxes for last year.