The way a dependent exemption benefits a tax return is by reducing taxable income. After a taxpayer’s adjusted gross income (AGI) is calculated, the number of exemptions is multiplied by the exemption amount and this total is then subtracted from the AGI before the income is taxed. This reduces the amount of income that will be taxed, thus reducing the amount of tax that will be owed.
To claim a dependent, however, a taxpayer must meet certain conditions and a dependent must meet certain requirements. The following summary can help individuals to know if they are eligible to claim a dependent and whom they can claim as an exemption. For complete guidelines, see the IRS Publication 501: “Exemptions, Standard Deductions and Filing Information."
Qualifications to Claim a Dependent
A taxpayer who wants to claim a dependent must meet the following tests: the Dependent Taxpayer Test, the Joint Return Test and the Citizen/Residency Test. A taxpayer must also meet certain income limits to claim dependents. If all of these are met, then the taxpayer is eligible to claim dependents on a tax return.
To meet the Dependent Taxpayer Test, a taxpayer must not be able to be claimed by someone else as a dependent. For example, a full time student under the age of 24 can be claimed by his or her parent as a dependent under certain conditions. If so, that student cannot claim a dependent on his or her personal tax return.
To meet the Joint Return Test, a person being claimed generally cannot be a married individual who is filing a joint return with their spouse. As an example, let’s take the full time student in the previous scenario. If that student is married and filing a joint return with their spouse, then the student generally cannot be claimed by his or her parent.
There is an exception to this rule, however. If the student and his or her spouse are filing merely to receive a refund and they would have no tax liability if they filed separately, then the student can be claimed. To continue with our example, the student and his or her spouse have only earned $3000 each during the year. Since they have not earned enough to be required to file if they filed as separate individuals, then the student can be claimed by the parent.
To meet the Citizen/Residency Test, a person being claimed must be a U.S. citizen or resident alien or a resident of Canada or Mexico for at least part of the year. This, however, does not apply to certain adopted children.
A taxpayer who desires to claim dependents must not exceed certain income requirements. The requirements are raised each year and the amount that can be exempted is gradually phased out beginning at a certain threshold. These income thresholds are generous. For example, in 2008, the dependent exemption began to be phased out at $239,950 for taxpayers who filed a joint return.
Qualifying Dependents
Dependents fall into two categories: Qualifying Child and Qualifying Relative. Once again, there are certain conditions to be met before a dependent can be considered a Qualifying Child or Relative. A Qualifying Child must meet the following tests: Age, Residency, Support, Relationship, and the Special Test (tiebreaker). A Qualifying Relative must meet the following tests: Not a Qualifying Child, Relationship, Income, and Support.
For a qualifying child to meet all of the necessary conditions, the child must be under the age of 19 at the year’s end or under the age of 24 if he or she is a full time student. The child must live with the taxpayer for more than half the year. The child must also not have provided more than half of their own support during the year. To meet the relationship test, the child must be a biological or foster child, a sibling (natural or step) or a descendant of these.
The Special Tiebreaker Test is used in cases where the child could be claimed by two taxpayers under the other tests. Generally, the person with the highest adjusted gross income (AGI) is allowed to claim the exemption, since they would receive the most tax benefit.
The rules for a Qualifying Relative are more straightforward. A Qualifying Relative must not be a Qualifying Child (under the above conditions), must live with the taxpayer all year long, and must receive more than half of their support from the taxpayer. The relative must also earn under a certain income threshold which is raised periodically and be related to the taxpayer in particular ways. Generally, in-laws, parents, siblings, nieces and nephews will qualify.
An understanding of dependent exemptions is beneficial for tax filers. The qualifications for children and relatives are met by most tax filers and knowing when to claim them helps taxpayers to maximize their deductions and avoid audits. For more information about dependent exemptions, including a requirement checklist, visit irs.gov. For more on income tax basics, see the article "Federal Income Tax Basics: Qualified Business Expenses."
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