An important part of figuring income taxes is determining who you can claim as a dependent and what credits are available. You can claim as a dependent a "qualifying child" or a "qualifying relative." The rules on claiming dependents can be complicated, especially in families where parents are divorced, never married or when many generations of one family live together. Fortunately, free help is available for low-income taxpayers at Volunteer Income Tax Assistance (VITA) sites or Tax Counseling for the Elderly (TCE) sites in Iowa.
The definitions of qualifying child and qualifying relative impact who can claim children or other relatives as dependents - and who cannot. This impacts whether you can claim refundable credits such as the Earned Income Credit. There are exceptions for divorced parents, never married parents or separated parents. Non-custodial parents may be able to claim the child tax credit, while the custodial parent may be able to claim the Child and Dependent Care Credit, Earned Income Credit and Head of Household filing status. They may be able to alternate the child tax credit from year to year, but only a custodial parent is able to use a qualifying child for the Earned Income Credit.
To make it easier to see what situations may come up, here are some examples. These examples involve three kinds of tax credits:
- The Earned Income Credit.
The Earned Income Credit is for low-income working people. The amount of the credit depends on how much a person earned and how many qualifying children they have (if any). The amount changes from year to year. Qualifying children are sons/daughters, sisters/brothers, stepchildren and siblings, grandchildren and adopted children as long as they lived with you for more than six months during the year. Foster children who are placed with you more than six months of the year by an authorized government or private placement agency also qualify.
The child(ren) must be:
- Under age 19, or under age 24 if they are full-time students, or;
- Totally and permanently disabled child(ren) of any age also qualify, and;
- Your qualifying child must be younger than you unless totally and permanently disabled, and;
- If both you and the parents of the child can claim the same qualifying child, you cannot claim him/her unless your Adjusted Gross Income (AGI) is higher than that of the parent with the highest AGI.
- All qualifying children need to have a social security number valid for employment.
- The Child Tax Credit and Credit for Other Dependents. The child tax credit is for children under age 17 who live with a taxpayer for more than half of the tax year. The Child Tax Credit can be up to $2,000 per child. If the credit exceeds the amount of tax owed, a part of the credit may be refundable and is called the additional child tax credit. The Child Tax Credit is for minors who have a Social Security Number. If a child has an Individual Taxpayer Identification Number (ITIN) or has aged out of the Child Tax Credit, then the Credit for Other Dependents may be available up to $500 per dependent; and
- The Dependent Care Tax Credit. This tax credit helps families who qualify use their child care costs to reduce their taxable income. Depending on their income, this credit can be between 20 percent and 35 percent of the first $3,000 in child care costs for one child. For two or more children, it can apply to 20-35 percent of the first $6,000 in child care costs. For instance, a worker who earns $25,000 and spends $3,000 on her one child can get a $900 credit or 30% of the $3,000 she spent in child care. The child has to be under the age of 13 when the expenses were incurred. Cost paid for care of a qualifying person such as a dependent or spouse who is either physically or mentally incapable of self-care may be qualified expense for this credit.
Example 1: Father, Son and three grandchildren
George, lives with his son, Alan, and his grandchildren, Jack, Jill and Jason. George earns $20,000 and Alan earns $12,000. George and Alan both help pay for household expenses. George contributes more than half the cost of maintaining the home.
If Alan takes the Earned Income Credit for any of his children, he will also have to claim them as dependents. The child tax credit also goes to the person claiming the child as a dependent. If Alan elects not to claim both of his children, George qualifies to claim that child as a dependent and child-related tax credits because George's AGI is higher than Alan's.
TIP: It is best if George and Alan agree how to file. George will likely qualify as head of household so long as he uses one of the children as a dependent. Alan could file single and claim one or two dependents and one or two children for the Earned Income Credit. This family shares expenses, so they should try to file taxes to make the most of the Earned Income Credit. If the family disagrees and both use the same dependents for the Earned Income Credit, the IRS will give the Earned Income Credit to Alan.
Example 2: A Divorced Couple, Harold and Nancy
Harold and Nancy got divorced in 2014. Neither Harold nor Nancy has remarried. They have three children. The children lived with Nancy for all of 2019. Harold had visitation. The divorce decree tells Harold he gets to take the children as dependents if he is current in child support. Harold is current. Harold will need a signed release from Nancy to be able to claim the children as dependents. A copy of the court order is not sufficient. The IRS has a form 8332 taxpayers can use.
- Harold can file Single. He can claim the children as dependents for the child tax credit for all three children.
- Nancy, if otherwise qualified, can take the Earned Income Tax Credit. Nancy should also be able to file head of household. This is an exception to the general rule that the person who can claim the children as dependents gets all the credits if they meet all of the qualifications.
Each individual taxpayer's situation is different. These are meant only as examples of how taxpayers may often be better off if they discuss how to get the most out of available tax benefits. If the taxpayers don't discuss or can't agree, the IRS will assign the benefit and it may not be nearly as beneficial.
The information included in this article is not intended or written to be used and cannot be used to avoid penalties under the Internal Revenue Code.