2009 U.S. Income Tax: Qualified Persons

The IRS is great for defining terms in ways that make most people more confused than they were before they read the definition. One good example is the term “qualifying dependant”.  The IRS defines a qualifying dependant as a qualifying child or a qualifying relative. But isn’t a child a relative? Yes, but certain other relatives can qualify as dependants, but the tests are somewhat different.

No relation
No relation

Qualifying Child

So what is a qualifying child? Basically they must be related to you, be under a certain age, live with you for a certain length of time and meet certain income requirements. There are six tests the IRS uses to determine if a child qualifies: relationship, age, residence, citizenship, support and a special test when the child can qualify for more than one person.  To pass the relationship test the child must be your son, daughter, brother, sister, stepchild, stepbrother/sister, half brother/sister, foster child or a descendent of any of them. So if you’re talking care of your great-grandson, they may qualify. Taking care of your foster child’s daughter? She may qualify as well.  

To pass the age test, the child must be under the age of 19 at the end of the year and younger than you. The age limit goes to 24 for children who are students. And there is no age limit if the person is considered to be permanently and totally disabled. The residence test says that the child must live in your home for more than half the year, 183 days.  Exceptions? You bet! What if either you or the child are temporarily absent for an extended period? Depending on the reason, that time can still count towards the residency requirement. Acceptable reasons include vacations, illness, education, business or military service. Jail time can qualify as long as there is an intention for you and the child to continue living with you after the incarceration ends. Your child must typically be a U.S. citizen, a resident alien, a U.S. national or a resident of Canada or Mexico to qualify as a dependant. There is an exception for adopted children, because of the challenges that are often involved, even if the child’s citizenship hasn’t changed, as long as they have lived with you all year, they pass the citizenship test.

The next test is support. For the child, they cannot have provided more than half of their own support in the year. This is different from the relative support test, where you must have provided over half their support. For the child, it only matters how much they contribute towards their own support. So if you provide 25% of their support, and their grandparents contribute 24% and the child provides 51%, they do not pass the test and cannot be claimed as a dependant. How do they define support? Any income they derive on their own, such as work or investment income. The only exclusion is income they receive for education, like scholarships.

The special test when a child might qualify for more than one person can be the biggest challenge here. The tax code only allows a person to be claimed as a dependant on one tax return each year. So while a child may meet the first five tests for two people, only one can actually claim them. So how do you know who gets to make the claim each year? Well the IRS has set up some tiebreakers to help. The first is parentage: if only one person is actually a parent, that person can claim the child. If the child lived with both parents an equal length of time, as determined by the number of overnight stays, the parent with the higher adjusted gross income will get the deductions. Of course this test becomes unnecessary if the two parents agree, either as part of the divorce decree or in writing at tax time, on a plan to handle this. One point: you cannot share or spilt up the tax benefits that go with claiming a qualifying child. There are a number of tax benefits that go with claiming a child, like childcare credits, personal exemptions, head of household status. Because one person cannot take the childcare credit while the other takes the head of household filing status for the same child, it is very important to plan this out ahead of time and have it in writing.

Qualifying Relative

Children are not the only people that can become a dependant. There are times when a parent or grandparent may be in need of care and if they are living with you, you may be able to claim them as dependants. Again, the IRS has a series of tests to help determine the status for tax purposes. They are the support, member of household, gross income and not a qualifying child tests.  There is no age test for the qualifying relative. Let’s start with the easy one: not a qualifying child test. The first thing to do when you’re determining the status of dependants is to see if they qualify under the child tests. If they do not, then you can check to see if they might meet the requirements as a relative instead.

So let’s look at the three other tests, starting with the support test which I mentioned earlier. For the child test, the IRS looks at how much of their own support the child provides. For the relative test, the key is how much of the support you provide. To qualify, you must provide more than half of the person’s total support during the year.  Generally this is a pretty easy test, but where it gets difficult is when more than one person provides support and no one ends up paying more than half. A good example is when three children are all contributing to the support of an aging parent. In a case like this, all of those who provide support must have an agreement in writing, stating who will be able to claim the dependant for that year. Unlike the child agreement, if there is nothing in writing, there is no claim allowed for anyone, so it is very important to make sure this is done.  And what qualifies as support? Generally all income that is received and USED for support is included in the calculation. So let’s say that your grandfather receives $1,000 from investments and another $1,000 in Social Security benefits, spends $500 in expenses and saves the other $1,500, only the $500 actually spent is included in determining how much of his own support he provided.

The next test is the member of household test. This is a two tail test: the person must either live with you for the entire year or they must be a relative that isn’t required to live with you. And who falls in to that category? Any of your first degree relatives (son, daughter, brother, sister, stepchild, stepbrother/sister, half brother/sister), foster child or their descendants qualify, as well as your parents, grandparents, stepparents, the brother and sister of your parents, the children of your brothers and sister. Foster parents are not included in this but adoptive family members are. None of these people are required to live with you in order to qualify as a member of your household. One aspect of this then is that a person who lives with you, who you are not related to, can be claimed as a dependant if they met the other requirements.

The last test then is the gross income test. Probably the simplest test, the person you want to claim cannot have made more than $3,650 during the year. This includes all sources of taxable income. This means that workman’s compensation benefits (which are taxable) are included, but scholarship funds are not.

One last thing to note: Even if your child or relative passes all the tests, they will be disqualified if the relationship or living arrangement violates any local law. You’d think that wouldn’t matter, but it’s important to remember.

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