Claiming a dependent on a tax return is a common practice and can have a significant impact on tax liability allowing you to save thousands of dollars on your taxes. Dependents can allow the taxpayer to qualify for tax benefits such as the child and dependent care credit, earned income credit, adoption credit and head of household filing status, which usually results in lower tax rates than single-filer or married-filing-separately status.
For the tax year 2021 (which will be submitted in 2022), the Child Tax Credit increased to $3,600 or $3,000 per child depending on the child’s age. Additionally, the Child Tax Credit for 2021 is fully refundable.
IRS Rules for Qualifying Dependents
As per Internal Revenue Service (IRS) rules, to qualify as a dependent, a person:
-must be a U.S. citizen, a U.S. national, or a resident of the U.S., Canada, or Mexico
-can only be claimed by one person and cannot claim a personal exemption for themselves
-cannot be married and file a joint tax return
The Internal Revenue Service (IRS) considers two types of qualifying dependents – a qualifying child and a qualifying relative.
To qualify as a dependent child, a person:
-must be related to the taxpayer as a child, foster child, stepchild, or a descendant of child, foster child, or stepchild
-must be a sibling, step-sibling, or a descendant of a sibling or step-sibling
The dependent must be either:
-under the age of 19 and younger than the taxpayer or spouse of the taxpayer
-under the age of 24, a full-time student, and younger than the taxpayer or spouse of the taxpayer
-permanently and totally disabled
-the dependent must not provide more than half of their financial support for the tax year
-the dependent must not file a joint return for the tax year (unless claiming a refund for taxes withheld)
-the dependent must have lived with the taxpayer for at least half the year.
Note the following absences that impact residency but count as time lived with the taxpayer:
-if a child was born or died during the tax year, the child is considered living with the taxpayer the entire year.
-receiving medical care
-performing military services
-detention in a juvenile facility
To qualify as a dependent relative, a person:
-must not qualify as another person’s child
-the person must live with the taxpayer the full tax year, or be:
-the taxpayers child, stepchild, foster child, or a descendant of child, foster child, or stepchild
-the taxpayers brother, sister, step-sibling of a descendant of the taxpayers brother, sister, or step-sibling
-the taxpayers parent, stepparent, grandparent, parent-in-law, brother-in-law, or sister-in-law
-the taxpayers uncle, aunt, nephew, or niece
The taxpayer can still claim a qualifying relative who doesn’t fall into a relationship above and didn’t reside with the taxpayer for the entire tax year due to:
-performing military services
The absence must be temporary (less than 6 months) and the taxpayer must be able to prove that the dependent would have resided with the taxpayer except for the approved absence.
The qualifying dependent must have a gross annual income less than $4,300 (this amount doesn’t include tax-exempt income such as Social Security). Additionally, the taxpayer must have provided at least half of the dependents financial support for the tax year, the dependent must not file a joint tax return for the tax year, and the dependent must be a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico.