Claiming Dependents on Your Federal Tax Return

Claiming one or more dependents on your tax return can save you a fair bit of money. The Internal Revenue Code is set up to allow taxpayers to deduct personal exemptions for themselves, as well as for each dependent they claim. These deductions subtract from the income they must pay taxes on. A slew of tax credits are based on the number of dependents you have: the child tax credit, the child and dependent care tax credit and the earned income tax credit.

If you’re not married and you support a dependent, you may be eligible for the head of household filing status.

Having dependents is definitely a good thing at tax time, but it’s important to know the rules that determine who you can claim and under what circumstances.

Rules That Apply to the Taxpayer

  • You can’t claim anyone as your dependent if you’re someone else’s dependent.
  • No one else can claim you as a dependent if you claim a dependent.

Rules that Apply to Your Dependents

  • You can’t claim a dependent who is married and files a joint return — with one exception. A married person can file a joint return and still be claimed as a dependent if the joint return was only filed so the couple could claim a refund. There would have been no tax liability for either spouse if they had filed separate returns.
  • Your dependent must be a U.S. citizen, a national or resident alien of the United States, or a resident of Canada or Mexico.
  • A dependent can be claimed by one and only one taxpayer in any given year.

Qualifying Children and Qualifying Relatives

Your dependent must be either a qualifying child or a qualifying relative. Different rules apply to each.

A qualifying child:

  • Must be related to you. This doesn’t necessarily mean you’re his parent. You might be his brother, aunt, foster parent, stepparent or even a half-sibling. But there must be a legal or familial relationship.
  • A child can only be your dependent until his 19th birthday unless he’s a full-time student. In this case, you can continue to claim him until he reaches age 24. There’s no age limit for disabled children.
  • If the child works, he cannot contribute more than half his own support. This is different from the tax laws that applied prior to 2005. Under those previous laws, a taxpayer had to provide more than half the support for the child. This change makes it easier for families relying on public assistance, charity and gifts from family members to claim a dependent.
  • He must live with you for more than half the year. Time spent away at college doesn’t count as living away from you. More than half a year means, at a minimum, six months and one day. If you share custody, you may want to keep a log of where the child spends each night.

You can also claim a qualifying relative as a dependent. Some relatives must live with you in your home for the full year, but exceptions exist for certain close relatives like your parent, grandparent, sibling, niece or nephew. These are the rules for qualifying relatives:

  • Your relative’s income must not exceed that of the amount of the personal exemption for that tax year.
  • You must provide more than half that person’s support. According to IRS Publication 501, total support includes what you spend to provide “food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities.” If multiple people support a single person, such as if you and your siblings support your parent, you can file a Multiple Support Agreement with the IRS that will allow just one of you to claim the supported person as a dependent.
  • If your dependent must live with you because he’s not closely enough related to you, your relationship can’t violate local law. For example, if your state prohibits co-habitation with a married person, you can’t claim a married individual as your dependent even if you meet all the other criteria.
  • Domestic partners can be claimed as dependents under the qualifying relative tests.

The Risk of an Audit

The Internal Revenue Service will almost certainly audit tax returns where two or more taxpayers attempt to claim the same dependent. Only one taxpayer can win in this situation. The losing taxpayer will probably have to pay additional taxes, plus penalties and interest. The IRS will use the following tie-breaker tests to determine which taxpayer is eligible to claim the dependent. The tie-breaker tests are listed in order of priority.

The taxpayer most eligible to claim the child as a dependent under the qualifying child criteria is:

  • A parent
  • The parent with whom the child lived for the longest time during the year. Chances are the child will spend at least one day more with one parent than the other parent, since there are usually 365 days in a year.
  • The parent with the highest adjusted gross income if the child spent exactly an equal amount of time with each of them.
  • If neither taxpayer is the child’s parent, the taxpayer with the highest adjusted gross income.

A non-qualifying parent can still claim the child as his dependent if the qualifying parent releases his or her claim to the dependency exemption by filing IRS Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents. You can indicate on this form the year or years for which you’re agreeing to release the exemption. You can also revoke the release if you later change your mind.

Protect yourself by making absolutely sure that you’re eligible to claim each dependent on your return. Special rules apply to parents who don’t live together regardless of whether they were or are married. Make sure you have documents that will support your claim.