March 3, 2015

dependentsEach year during tax season, U.S. taxpayers spend millions of hours compiling and sorting tax documents, meeting with tax professionals and hoping to stay out of the red. Some of the most important tax information affecting your return, however, is not related to your W2 or profit/loss statement; it’s related to your household.

For many taxpayers, the question “who are my dependents” is often not seriously contemplated until they are sitting directly across the table from their tax preparer. A thorough tax preparer will be able to help you examine details of your household and determine who may qualify. However, educating yourself on the following points will help you get the most out of your return.

Dependents Don’t Have To Be Related To You

When people talk about their dependents, most people infer they are speaking of their children. Indeed, a major category of dependents is the “qualifying child“. This category includes, for example, children and grandchildren who:

1) lives with you more than half the year,

2) are under the age of 19,

3) relied on you for more than half of their support and

4) if married, does not file a joint return unless it’s solely to claim a tax credit.

Adopted children, step-children, siblings and descendants of both also fall into this category.

A second, broader category of dependents falls under the “qualifying relative” category. Although it is implied by the name, no familial relationship is actually required under this provision. In fact, a qualifying relative can be anyone who:

1) lives with the taxpayer all year,

2) made less than the exemption amount ($3,950 for 2014),

3) relied on the taxpayer for more than half their support and

4) is not a qualifying child of another taxpayer.

An important distinctions between the qualifying child and qualifying relative categories are that the qualifying relative has no “age test”, but does have a “gross income test”.

Dependents Don’t Have To Live With You

collegeGenerally, dependents must meet a “residency test” in order to be claimed. A qualifying child has to live with the taxpayer more than half the year and qualifying relatives must live with the taxpayer all year to be considered dependents. However, a number of exceptions apply.

First, the qualifying relative category carves out an exception to the residency test for persons related to the taxpayer, such as children who exceed the age test, as well as siblings and parents who are related directly or through marriage. Under this provision, these related people are not required to be a member of the household where the taxpayer resides. For example, a taxpayer can claim a parent who does not reside with them as long as the “support test” and the “gross income test” are met.

Second, a qualifying child is not required to meet the traditional residency test if he/she is a full-time student during any five months of the year. This is because education is considered a “temporary absence” where the main home remains within the taxpayers home. Additionally, for full-time students, the age test increases from being under 19 to under 24 years of age.

Dependents Can Have Income

dependentsFinally, a person can be claimed as a dependent even if that person has their own income. Applying the gross income test correctly requires you to identify the type of dependent and the type of income received by that person. When applicable, the gross income test uses an income threshold that matches the exemption amount for the applicable year. In 2014 for example, that threshold (exemption) is $3,950.

First, the gross income test is primarily a concern for a qualifying relative, as the qualifying child dependent does not have to satisfy a gross income test. The following example is illustrative of this distinction:

In 2014, Junior (age 17) worked part-time for his father’s landscaping business and earned $5,000 for the year. Even though Junior’s income exceeded the $3,950 threshold amount, because he is under 19 years old and meets both the residency and support tests, his income does not disqualify him from being a qualifying child. However, if Junior was 22 years old in 2014 and not a full-time student, he would not qualify as a dependent under either category because he fails both the age test for a qualifying child and the income test for the qualifying relative.

Second, the type of income derived must be considered in the gross income test. Tax exempt income, such as social security benefits or municipal bond interest, is not considered income for the gross income test. So for example, if a taxpayer provides more than half the support for her aged parent and the parent receives $15,000/yr in untaxed social security benefits, the parent would still qualify under the income test as a qualifying relative.

In conclusion, being aware of the various ways a person can qualify as a dependent will help you be informed as a taxpayer, as well as ensure that you are providing the proper information to your tax professional (or software) and will ultimately help you get the most out of your tax return.

For more reading on this topic, see IRC 152 or IRS Publication 17.