Walter & Shuffain, P.C.

Who's Your Dependent?

For the first time in years, the Working Families Tax Relief Act of 2004 has modified the rules for who qualifies as a dependent. Beginning in 2005, dependents must be either a qualifying child or a qualifying relative.

Under the rules in effect through 2004, a taxpayer was entitled to a dependency exemption if the following five tests were met (although the exemption is phased-out for high income taxpayers):

Relationship/Household Test — A dependent must be a relative, as defined in the tax code, of the taxpayer or a person not related to the taxpayer if the unrelated person was a member of the taxpayer's household during the entire tax year.
Support Test — The taxpayer must have provided over one-half of the dependent's support, however, the dependency deduction for a child belongs to a divorced parent who has custody for the greater part of the year unless the custodial parent releases the exemption.
Gross Income Test — The dependent's gross income must be less than the exemption amount (which is $3,200 for 2005). This test does not apply to the taxpayer's children who are under age 19 or who were full-time students under the age of 24.
Citizenship Test — The dependent must be a U.S. citizen or national, or a resident of the U.S., Canada, or Mexico for some part of the tax year.
Return Test — An individual will generally not qualify as a dependent if he or she files a joint return with a spouse.

Working Families Tax Act Changes

Under the new law a dependent must be either a qualifying child or a qualifying relative. A child that fails to qualify as a "qualifying child" may still qualify as a dependent under the "qualifying relative" test. The new law has adopted a uniform definition of child to include the taxpayer's natural children, stepchildren, adopted children and eligible foster children. Under the new law a person claimed as a dependent cannot claim any dependents on his or her own return.

Qualifying Child

A qualifying child for purposes of the dependency exemption must satisfy the following four tests:

Relationship Test — A qualifying child must be the taxpayer's child, sibling (including half-brother or half-sister), stepsibling or a decedent of any of the aforementioned.
Age Test — As of the close of the tax year in which the taxpayer's year begins, a qualifying child must not have attained age 19, or must be a student who has not attained the age of 24.
Abode test — A qualifying child must have the same principal place of abode as the taxpayer for more than half of the taxpayer's tax year.
Support Test — A qualifying child must not have provided more than one half of his or her own support during the calendar year in which the taxpayer's tax year begins.

Note that under prior law the taxpayer must have provided more than one-half of the child's support to claim the child as a dependent. Note also that the gross income test has been eliminated for a qualifying child.

If a child is a qualifying child of more than one taxpayer the following tiebreaker rules apply:

If only one of the taxpayers is the child's parent, the child is the qualifying child for that parent.
If two of the taxpayers are the child's parents and they do not file a joint return together, the child is the qualifying child for the parent with whom the child resided for the longest period during the year.
If a child spends equal time residing with each parent, the child is the qualifying child of the parent with the highest adjusted gross income.
If none of the taxpayers is the child's parent, the child is the qualifying child of the taxpayer with the highest adjusted gross income.

Note that a child can continue to be treated as a dependent of both parents for the purpose of deducting medical expenses, the exclusion from income of qualified fringe benefits used by the child, and the exclusion from income for qualified health insurance payments for the child's medical expenses.

Qualifying Relative

A qualifying relative must satisfy tests relating to relationship, gross income and support. The rules for qualifying relatives generally absorb the relationship, gross income and support tests in effect through 2004. The only new dependency test that must be satisfied under the qualifying relative test is that a qualifying relative cannot be a qualifying child.

A qualifying relative also includes any individual, other than the taxpayer's spouse, who had the same abode as the taxpayer and was a member of the taxpayer's household during the taxpayer's tax year.

The new law no longer presumes that the custodial parent is entitled to the dependency exemption; instead it spells out the tests that must be satisfied before the non-custodial parent may claim the exemption. The child is the qualifying child or relative of the non-custodial parent only if the parent's divorce or separation instrument so provides, or if the custodial parent provides the IRS with a written signed statement waiving the exemption.

Walter & Shuffain, P.C.

Certified Public Accountants & Business Advisors

Who's Your Dependent?

Working Families Tax Act Changes

Qualifying Child

Qualifying Relative