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Anatomy of a Tax Return: 1040 Series Part 4 Dependents

Let's go back for the part of a return that I skipped: dependents!


This is another thing that seems simple but is so easy to get wrong. All you have to do, though, is go through the rules and answer some questions and you will get it right.


There are two types of dependents: Qualifying Child and Qualifying Relative. Sounds easy, right?


To be considered a qualifying child, a child must meet ALL of the following criteria:


The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendent of one of these

  1. The child must be a child under age 19 or a full-time student under age 24 (and younger than you), or a permanently disabled person

  2. The child must not provide more than half of their own support for the year

  3. The child must not be filing a joint return with a spouse (or must file only to claim a refund of withholding or estimated taxes)

  4. The child must live with you for more than half of the year (except when they don't have to live with you)

To be considered a qualifying relative, the person must meet ALL of the following:

  1. Be on the list of allowed relatives

  2. Not be a qualifying child of another taxpayer

  3. have gross income of less than $4,300 for 2021

  4. You must provide more than half the support for the person for the tax year


The list of allowed relatives includes:son, daughter, stepchild, foster child, brother, sister, half brother, half sister, father, mother, step brother, stepsister, stepfather, stepmother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law or a descendant or ancestor of one of these. It also includes any other person who lived with you all year.


If you have a qualifying child or qualifying relative, you can probably claim that person as a dependent if they are a US citizen or resident, if they are not married, and if they have a social security number. If all of those don't apply, there may be some exceptions that allow you to claim them anyway, but those would be special circumstances.


Most of the time, this is a pretty boring analysis. It is usually limited to a taxpayer's children that live in their home or are full-time students, and once they age out, there isn't anything more to discuss. However, there are some interesting exceptions that sometimes pop up.


For example, I have heard of a couple who was married and filed a joint tax return every year. They provided a home and all of the support for several of their grandchildren, while the parent of these kids was off participating in high risk activities like recreational use of narcotics. The grandchildren lived full-time with their grandparents and received no support from their parents.


Every year, the parent of these children would file a tax return claiming the children as dependents. However, the grandparents are the ones actually entitled to claim them. Since the parent is filing first, the grandparents usually have to mail in their tax return instead of filing electronically, and then provide evidence to the IRS that they are entitled to claim the grandchildren. It is a much slower and more frustrating process for these people to file their tax return due to the bad behavior of their child.


Another interesting aspect of claiming dependents arises when the parents are divorced. Many times, a divorce decree will include instructions for how the dependency of the children is to be treated. However, the IRS does not care what your divorce decree says. This has caused many people to have problems when the wrong spouse claims the kids.


The IRS only cares who the "primary custodial parent" is. For this purpose, the "primary custodial parent" is the parent with whom the child spends the most nights in the year. If its leap year and each parent has the kid for 183 nights, the parent with the higher AGI is the custodial parent.


Sometimes, a divorce decree will allow a person who is not the custodial parent to claim the child. And sometimes, a former spouse might claim a child when the divorce decree says they shouldn't. I know that's hard to believe because people who get divorces are known for their calm and rational behavior, but I have seen it happen.




From the IRS perspective, if you are the noncustodial parent, you must have a signed Form 8332 or equivalent statement from the custodial parent stating that the custodial parent will not claim the child for that year and you should include that form with your tax return. If you do not have this, the IRS will allow the custodial parent to claim the child, even if the divorce decree says something different.



When this happens, there really isn't any recourse to take with the IRS. If you really want to fight with your former spouse about it, you probably need to dial up your divorce attorney and head back to court. Most of the time, it probably isn't worth paying the legal fees to fight about it. But it might be fun to get your ex yelled at by a judge, so you have to weigh the costs and benefits.



And, as I discussed above, it helps if you are the one to file first, since the efile system will automatically reject a return if it has a dependent that has already been claimed by someone else.


One final interesting case that I've encountered with respect to dependency happens when young men and women go on missions for The Church of Jesus Christ of Latter-day Saints ("the Church"). While this is the situation I'm most familiar with, there may be similar results for missionaries of other faiths, but I haven't encountered those yet.


Most of the time, these missionaries are 18-20 year olds who were full-time students before and after their missions. While they are serving the mission, however, the Church provides all of their support. Missionaries and their families usually are responsible for paying for their missions, but this is done through donations to the mission fund rather than by direct support. So, during the time the missionary is serving, the parent is not providing more than half of the child's support and the child is not living with the parent.


If a missionary were to leave Jan 1 of a year and return Dec 31 of the following year, that missionary would not qualify as a dependent. However, usually the missionary would leave part-way through the year and return part-way through the next year. If they were living at home or away as full-time students for the first half of the year, and then left on a mission, they might qualify as a dependent for the first year, but not the second. Or, they might qualify as a dependent the year they return, but not the year they leave.

A few final points on dependents. If a dependent is born or dies during the year, they are considered to have lived with you for the entire year. So if your baby is due in January and you can convince it to arrive a few days early in December, you can grab that child tax credit for the whole year. I have a coworker who managed to do that twice!


There is also an exception for kidnapped children that might allow you to include the kidnapped child for purposes of claiming a child tax credit, the earned income credit, or even for claiming head of household or qualifying widow(er) filing status.


As with everything in the tax world, the general rules are straightforward, but there are always unique situations that can occur. So if you have a question, make sure you talk to your tax advisor.

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