As you prepare your tax returns over the next few months, you'll want to do everything you can in order to cut your tax bill. One way that many families reduce their taxes is by claiming dependents on their returns. Doing so gives you personal exemptions that you can use to reduce your taxable income, which in turn can produce hundreds or even thousands of dollars in tax savings. Yet many people don't know whether they can claim a given person as a dependent for tax purposes. Below, we'll take a closer look at this question.
What is a dependent?
According to the IRS, a dependent must be either a qualifying child or a qualifying relative. To be a qualifying child, you must meet a five-part test:
- The child must be your son or daughter, stepchild, foster child, sibling or half-sibling, or step-sibling, or a descendant of any of those people.
- The child must be under age 19 at the end of the year, except that students can qualify if they're under age 24, and disabled people can qualify regardless of age.
- The child must live with you for more than half the year.
- The child must not provide more than half of his or her support for the year.
- The child generally must not file a joint return for the year.
On the other hand, to be a qualifying relative, the conditions are different. The four tests are:
- The person can't be a qualifying child of anyone.
- The person must either live with you all year as a member of your household or be a relative. All the relationships listed under the qualifying-child test would qualify, but parents, grandparents, stepparents, and aunts and uncles also meet the test.
- The person must have gross income of less than $4,000.
- You must provide more than half the person's support for the year.
On top of the tests above, there are other conditions you have to meet to claim a dependent. First, anyone you claim as a dependent must be a U.S. citizen, resident alien, or national, or a resident of Canada or Mexico. There are exceptions, however, for adopted children as long as the child lived with you as a member of your household all year.
In addition, you can't claim dependent exemptions if you yourself could be claimed as a dependent on another person's tax return. If you file jointly, your spouse must also not be someone else's dependent for tax purposes.
Finally, in some limited cases, the dependent could be a qualifying child for more than one person. In that case, special tiebreaker rules apply to determine who's entitled to claim the dependent. They include:
- If only one person is the parent of the child, then the parent can claim the dependent.
- If both parents claim the child, the IRS will give the dependent exemption to the parent that the child lived with the longest. In the case of a tie, the parent with the higher adjusted gross income gets the exemption.
- If no parent can claim the child, then the exemption goes to whoever had the highest AGI.
Note that these rules are somewhat manipulable. If two people could both treat a child as a qualifying child, then they can often come to an agreement that will give the exemption to the desired taxpayer.
Make the most of dependents
Because the dependent exemption reduces taxable income, you have to look closely at the tax bracket of those who could claim the exemption as well as any provisions that could reduce or eliminate eligibility to take personal exemptions because of high income levels. By knowing the rules, you can often work together to ensure the best possible tax result for your family.