With the Tax Cuts and Jobs Act (TCJA) in place and the exemption for dependents eliminated it would be easy to think that dependent status doesn't matter anymore. That would be a big mistake. First, many states did not conform with Federal tax law and there are still exemptions for dependents on state tax returns. At the Federal level dependent status can affect things like the new dependent's credit and other credits like the American Opportunity Credit. So, let's take a look at what the IRS says about dependents (I am going to primarily focus on children).
To be treated as a dependent the individual must...
- Be what you would normally consider as a child or a sibling (including "steps") or a descendant of a "child"
- Isn't 19 years old yet or is a student and not 24 yet (has to be full-time for each of at least 5 months during the year)
- Has lived with the taxpayer for more than one-half of the tax year
- Has not provided over one-half of his or her own support for the tax year
- Hasn't filed a joint return with a spouse
In the case of other relatives, the major difference is an income limit on the dependent (this could qualify for a child over the age limits above).
The rules above are pretty straight forward, but there are a few things we need to clarify.
- Time away from the home to go to college, go on vacation or military service are included as time living with the taxpayer.
- It is important to note that you do not have to provide more than ½ of the support for the child, but that the child not provide more than ½ of his or her support. This generally becomes an issue for college-aid students. Some key points are:
- Scholarships for "study" at an educational organization are not included when calculating the amount of support provided by anyone
- Student loan proceeds are support furnished by the student if the student is required to repay the loan
When does it matter? Well you'll want to take a close look in the following situations.
- Your Adjusted Gross Income (AGI) is above the threshold for the American Opportunity Credit and you child had education expenses eligible for the credit. Service Academy Cadets and Midshipmen should consider this to claim a credit for book expenses
- A child is in college with a lot of loans. You'll want to be able to prove that your child did not provide more than ½ of his or her support so that you can qualify for the dependent's credit of $500.
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