The increasing taxes have made it really difficult for people to maintain their monthly budget. However, wise tax spending and pre-preparing yourself for taxes can help you get rid of a number of unwanted taxes. Generally, there are two types of taxes including General Sales Tax and Income Tax. You have to pay General Sales Tax on everything you purchase. The only way to reduce your General Sales Tax is to reduce your expenditures.
However, Income Tax has bigger and fiercer impact on your budget. There are a number of techniques of reducing your income taxes including filing your taxes on time and including all the necessary deductions in your income tax files.
However, there is another less known but very effective way of reducing your income taxes i.e. to claim child on taxes. It generally refers to claiming a dependant on taxes. Now the question is who claims child on taxes and why?
The Internal Revenue Services has issued some rules and regulations according to which, lower income tax applies to people with dependants. Some people choose their older relatives as dependants. However, it is a huge financial and moral responsibility. Therefore, most of the people choose children as their dependants.
In this article about who claims child on taxes, we will discuss about different legal and moral perspectives of claiming a child as a dependant and shed light on how it can help you save taxes.
Who Claims Child as Dependant?
If you want to know about who claims child on taxes, you first need to understand who claims child as a dependant. The answer is quantifiable and breakable into numbers. When you claim a child as dependant and get approved, you save at least $4000 on your federal income taxes. Generically, it is a substantial saving for paying your taxes next fiscal year.
The basic rules to claim a child as dependant are not very complicated. These rules also help you determine your affordability for daycare expenses and medical expenses. These expenses are included in the itemized deductions in your tax files. The rules may become a little complicated for divorced parents or in other certain situations. For example, if your daughter lives off-shore for studies or your cousin stays with you during vacation or a son in college doing part-time job.
Tax Benefits for Having Child as Dependant
A person, who claims child on taxes, gets many benefits in return. Apart from cutting numbers from their federal income taxes, people who claim child on taxes also get the following benefits.
Increasing Dependency Exemption
In 2012, the dependency exemption was $3800 however, it is $4000 in 2015 and coming years. We can clearly notice a trend of increment in dependency exemption therefore, it is safe to expect that the exemption tax benefit will increase in coming years.
Child Tax Credit Benefit
According to new rules, the child tax credit is $1000 per child. It is even a safer way than dependency exemption to save on taxes.
Additional Child Tax Credit Benefit
Apart from the basic child tax credit, person who claims child on taxes can also obtain additional child tax credit benefit. You become eligible for additional child tax credit benefit only when the amount of your child tax credit benefit is more than your federal income taxes.
Child and Dependent Care Credit
If you are a working parent and your child is under the age of 13 years, and you pay for child care then you can also apply for Child and Dependent Care Credit. The standard amount for Child and Dependent Care Credit is 35% of $3000 for one child. For two children, it is 35% of $6000. The childcare expenses credit range is 20% to 35%. The IRS determines the credit percentage after evaluating your application.
Earned Income Tax Credit Benefit
A person, who claims child on taxes, also gets earned income tax benefit. If you have three children and your adjusted gross income or self-employment income falls less than $45,100 then you become eligible for Earned Income Tax Credit benefit. If you have one child and your gross income is less than $36,920 then you qualify for this benefit. The benefit is adjusted according to the number of your children and your gross income. The IRS sends you the difference of calculations with tax returns.
The Rules for Qualifying to Claim a Child on Taxes
The qualification rules are not complicated and most of the people easily qualify. The IRS describes dependants as qualifying child and qualifying relative. Generally, the qualifying person must meet the given requirements.
- The qualifying person must be a permanent citizen of United States of America, Canada or Mexico.
- The qualifying person must be claimed by only one person. The IRS resolves the case with tiebreaker rules if more than one people claim on a person.
- The person as dependant should not be married and should not file joint taxes.
Apart from these qualification terms, there are certain personalized terms for child and relative, given below.
Qualification Terms for a Child
The qualifying child must be directly related with you as first blood relation. Son, daughter, brother, sister, step child, half brother, half sister, eligible foster child, adopted child, or an offspring of them can qualify as a child dependant.
If a child is disabled then there is no age limit for dependency. If the child is full-time student then the maximum age limit is under 24 years. Otherwise, the maximum age limit is under 19 years.
Generally, the IRS requires the child to have lived with you for at least six months. However, exceptions apply in some cases.
You should be able to provide financial support to your child. If the child is a part-time employee then the IRS will evaluate the expenses. The child becomes eligible only if the job provides around half or less than half of child’s financial support.
According to Publication 501 by the IRS, a person who claims child on taxes should be the only person to claim the dependency of child. We will discuss multiple claim scenarios later in the article.
Qualification Terms for a Relative
- IRS Publication 501 describes 30 types of relative residencies for residency requirement. Generally, the relative must have spent at least six months with you.
- You should provide at least half of the financial support to your relative.
- The adjusted gross income of your relative should not be more than $4000.
- You should be the only person to claim their dependency.
The Process of Claiming Dependants on Taxes
Many people inquire about who claims child on taxes but few people want to know about the exact process of claiming dependants on taxes. Remember that any mistake in your tax files may exempt you from claiming dependants.
It is highly recommended to e-file your taxes at least two months before the deadline. Apart from the ease of filing, it will also help you to find out your eligibility to claim for dependants and resolve errors in order to obtain tax benefits for the given year.
A person who claims child on taxes needs to follow the given simple steps.
- Form 1040 or Form 1040A is used to file your income taxes. Unfortunately, form 1040EZ cannot be used to claim dependants on taxes.
- Enter the full names of your dependants on the first page of your tax return form. Also, enter their Social Security Numbers and their relationship with taxpayer in the given sections. Use ITIN number if you do not have dependant’s SSN.
- Now evaluate the child tax credit. You can claim child tax credit throughout the year for children under the age of 17 years. Check boxes for each dependant that qualifies for child tax credit.
- Now enter the total of your tax exemptions on the second page of your form. According to new rules introduced in 2015, the tax exemption amount is $4000. You can claim one dependant for yourself and one dependant for your spouse if you are filing taxes separately. The married couples filing joint taxes can claim one dependant for both partners only.
Email your e-files to the IRS and wait for the response that is due within six to eight weeks.
What is Child Tax Credit?
A person who claims child on taxes also gets child tax credit benefit. The Child Tax Credit policy is federal program to offset the child raising expenses. The taxpayers can apply for up to $1000 per child tax credit for 2015 and coming years. The policy is subject to change on notice. If your earned income is more than $3000 then the child tax credit is partially refundable. In 2017, the tax rates are expected to hike up to 15% and therefore, the refundable tax credit policy will dissolve in 2017.
The qualification terms of child tax credit include the following.
- The child must be 16 years or younger.
- The child must be permanent US resident, citizen, or resident alien.
- The child must be claimed as dependant.
- The child must have spent at least half year or 183 nights with you.
- The personal financial support of child must not exceed half of the total finances.
What Happens if More than One People Claim on Same Dependant?
Now that you already know who claims child on taxes, we will move to the complicated part.
It is not uncommon that more than one persons claim on same dependant. It mostly happens when divorced partners claim on their child or children as dependants.
According to the IRS rules, only one person can drive the tax benefits from one dependant. However, if the married couple has filed taxes jointly and claimed a dependant then the tax benefits will be given to both applicants.
If the married couple with a dependant files taxes jointly and splits after a few years then the exception applies here. The divorced couple needs to have dependant decree written on their divorce agreement. With dependant decree, the divorced couple can individually file the taxes in paper form along with a copy of divorce agreement in order to obtain the tax benefits. If both partners file their taxes and attach the divorce agreement, the tax benefits will be given to both of them.
A person who claims child on taxes may be deprived of due benefit if someone else claims his dependant. In this case, your e-application will be rejected by the IRS. The Internal Revenue Services system does not process tiebreaker rules. Therefore, you will have to send your tax files via mail along with a complete printed copy of your dependant authority documents.
If you have already claimed dependant or dependants then make sure to e-file early in order to amend the files or send tax files via mail and obtain tax benefits in the given year.
If your e-file was rejected because someone else has already claimed your dependant then follow the given steps.
- Call the IRS helpline and explain the situation.
- Log in to your e-file account and print your tax e-file.
- Attach the required documents like dependant authority document or any other document.
- Send the file to the IRS via mail.
The IRS has history and data of the person who claims child on taxes. The agency now process both tax files and apply tiebreaker rules. The IRS may require you to undergo a few tests to prove dependant authority. These tests are included in tiebreaker rules and denial to participate in these tests may lead you to lose your verdict.
Following are the tiebreaker rules that also apply if you want to claim a child as a dependant.
The child will become your dependant if you qualify for the first relationship with the child i.e. parent.
This test applies if the parents of a child are divorced, separated or not living with each other any longer. If the parents of child apply separately for dependency, the claim is approved for the parent with whom, the child has spent more time.
It applies if the child has spent equal time with both applicants. In income test, the person who claims child on taxes with higher gross income qualifies for child custody.
If both parents disqualify for the tests then the child becomes qualifying person for the parent with higher adjusted gross income.
No Priority Test
If both partners qualify for child dependency case but none of them applies for it then the child becomes qualifying person and becomes dependant of the parent with higher adjusted gross income.
If the child meets all requirements for qualification and the parents were unmarried but lived with the child then the parents mutually decide about child dependency. After that, the child dependency is allotted to the parent who claims child on taxes.
In some cases, a parent qualifies for child dependency but may want to relinquish dependency later. In this case, the ex-spouse or other parent can apply only when the custodian parent applies for exemption of dependency. Form 8332 is used for dependency exemption filing.
Special Rules for Separated Parents
We have already described the primary rules that apply to divorced or separated parents. However, there is a special rule that applies if the divorced or separated parents lived apart throughout all time in last six months. This special rule also applies if they have written special divorce decree, separation agreement or maintenance agreement.
The custodial parent gets exemption from dependency if the child received more than half financial and residential support from one or both parents. It is essential that the child must have spent the year in custody of one or both parents. Different rules apply if the divorce agreement was entered in 1985 or prior to the mentioned year. In divorce decree or separation agreement, a clause provides the right to waive dependency exemption to the custodial parent. In this case, the non-custodial parent also provides at least $600 for claiming exemption.
If the noncustodial parent applies for dependent exemption and does not attach Form 8332 along with the tax return files, the IRS rejects the application. The noncustodial parent needs to attach the cover page and a copy of the exemption agreement on divorce decree along with tax return files if the custodial parent refuses to sign on Form 8332. This is an exceptional case and the IRS may further interrogate and process the application before approval.
Some people may mark their child as a dependent by mistake. In this case, the Internal Revenue Services allows you to make changes either within three years of first filing date or within two years of paying relevant taxes. The general rule of penalties will apply in case of error however, the IRS may waive the penalties if you convince the authorities that it was an unintentional error.
When you file your first tax returns, the IRS has three years of time to examine your tax files. If the IRS finds that you have filed same child as dependant for two returns, the IRS will issue a notice of penalties. You may convince the IRS to remove penalties and amend your files or refuse to amend your files. In the latter case, the IRS will conduct an audit and may charge undeniable penalties if you are found guilty.
You may know someone who claims child on taxes as it has become a common practice in the US now. However, professional guidance is essential when preparing your tax files, especially for divorced couples. Make sure that you are not denying your due tax benefits by not claiming child on taxes.
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