3.2 Dependents and exemptions

Claiming dependents on your tax return can significantly impact your tax liability. Understanding the criteria for qualifying children and relatives is crucial, as it affects various credits and deductions available to you.

Dependents must meet specific citizenship, residency, and relationship requirements. The rules differ for qualifying children versus qualifying relatives, with age and support tests playing key roles in determining eligibility for these valuable tax benefits.

Dependent Criteria for Tax Returns

Citizenship and Residency Requirements

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• Dependents must be U.S. citizens, U.S. nationals, U.S. resident aliens, or residents of Canada or Mexico
• Taxpayers provide more than half of dependent's total support for the tax year
  • Exceptions apply for multiple support agreements
  • Special rules for children of divorced or separated parents
• Dependents cannot file joint returns with spouses (exceptions for refund claims)

Relationship and Age Considerations

• Relationship test includes blood relatives, step-relatives, and legally adopted children
• Age requirements differ for qualifying children and qualifying relatives
• Individuals cannot be claimed as dependents if eligible on another taxpayer's return
• Special rules apply for permanently and totally disabled dependents
• Full-time student status affects dependency criteria

Qualifying Children vs Relatives

Qualifying Child Criteria

• Must meet relationship, age, residency, support, and joint return tests
• Age test requires children to be under 19, or under 24 if full-time students
  • Exception for permanently and totally disabled individuals
• Residency test mandates living with taxpayer for over half the tax year
  • Temporary absences (education, vacation, medical care) allowed

Qualifying Relative Requirements

• Must satisfy relationship, gross income, support, and not-a-qualifying-child tests
• Gross income must be less than the exemption amount for the tax year
• Taxpayer provides more than half of total support for the year
• No specific age restrictions for qualifying relatives
• Broader relationship test includes non-blood relatives living with taxpayer all year

Special Considerations

• Divorced or separated parents have specific rules for claiming children as dependents
• Qualifying relatives can be any age, unlike qualifying children
• Support test calculations differ between qualifying children and relatives

Dependent Exemption Amount

Calculation and Adjustments

• Set dollar figure changes annually based on inflation adjustments
• Personal and dependency exemptions phase out for high-income taxpayers
• Exemption amount reduces or eliminates when AGI exceeds certain thresholds
  • Example: $4,050 exemption in 2017, phased out for single filers with AGI over$261,500
• Special rules for multiple support agreements and divorced/separated parents
• Exemption amount subtracted from AGI to determine taxable income

Tax Law Impacts

• Tax Cuts and Jobs Act of 2017 temporarily reduced exemption amount to zero
• Taxpayers must stay informed about current year's exemption amount
• Phase-out thresholds change annually, affecting tax planning strategies
  • Example: 2021 phase-out begins at $323,800 for married filing jointly

Dependents' Impact on Taxes

Tax Credits for Dependents

• Child Tax Credit provides up to $2,000 per qualifying child (as of 2021)
• Additional Child Tax Credit offers refundable portion of Child Tax Credit
• Credit for Other Dependents allows $500 for dependents not eligible for Child Tax Credit
• Earned Income Tax Credit (EITC) amount varies based on number of qualifying children
  • Example: Maximum EITC for 3+ children in 2021 is $6,728

Education-Related Benefits

• American Opportunity Credit offers up to $2,500 per eligible student
• Lifetime Learning Credit provides up to $2,000 per tax return for qualified education expenses
• Dependents' student status affects eligibility for these credits

Additional Tax Considerations

• Child and Dependent Care Credit available for qualifying dependent care expenses
  • Up to $3,000 for one dependent,$6,000 for two or more (as of 2021)
• Claiming dependents impacts filing status (Head of Household status)
• Medical expenses for dependents included in medical expense deduction calculation
• Adoption credit and premium tax credit under Affordable Care Act affected by dependents