Beyond "Leave it to Beaver" families: Who gets to claim personal and dependent exemptions?
Who gets to claim a child on their tax return can be a question worth thousands of dollars. It's such an important and fundamental question that it's a good place to start your study of tax law.
Every year, there are stories of separated parents or other relatives of a child who race one another to the tax preparer in January as soon as tax forms come out, each one hoping to claim the child on their tax tax return. Depending on income and other circumstances, reporting a child as a dependent on a tax return could potentially increase a tax refund by thousands of dollars.
A typical client at our VITA site might be a minimum wage working parent of two children earning about $14,000 per year.
If she qualifies to claim the children as her "qualifying children" dependents on her tax return, you may be able to prepare a tax return for her that will put roughly $7,000 in federal and state refund money in her bank account within a few weeks.
On the other hand, if it turns out that she doesn't qualify to claim the children on her return, she may wind up with no refund at all, or possibly even owing the government some money.
So correctly answering the question, "Can this taxpayer claim these children on her return" could literally be a $7,000 question.
For a parent in her circumstances, that $7,000 difference between claiming the children and not claiming the children means the difference between living on an income below the poverty line and an income above the poverty line.
If the world had nothing but "Leave it to Beaver" families, dependency questions would be easy. It was easy to see that Wally and Beaver Cleaver met all the criteria to be "qualifying child" dependents of their parents, Ward and June on the television sitcom.
The real world is often more complicated, especially at VITA sites like ours, serving many households with complicated family structures. Determining who, if anyone, can claim another person as a dependent can often be very tricky.
Suppose the child lived with multiple relatives at various points during the year, or the child was away at college, or had scholarships or grants or loans, or worked part-time and contributed to his own support? Suppose the child is an adult child who is disabled and unable to live independently? What happens if you are a June graduate and only attended school for the first six months of the year--how does that affect whether your parents can claim you on their return? What happens if a child lives in a household with several adults, e.g., a grandmother, uncle, and older sister, who all want to claim him on their tax return? What happens if a child lived with his mother during the week and his father on the weekends, but the father paid child support and covered all the child's expenses during the whole year? There are multiple variations on these scenarios and the answers get complicated.
These are all vital questions you may face from taxpayers in January (and they are also the kind of questions you will have to answer on the certification exam), so it's important to figure out how to navigate the IRS resources that will help you answer those questions accurately and efficiently.
Here are some suggestions before you plunge in and get started on the "IRS Quiz Game"
If you get stumped by a tricky question, use the tables in Tab C of the Volunteer Resource Guide (Pub 4012, that spiral bound book with the tabs) to reason through the situations. If you don't have your hardcopy of Pub 4012 handy, here's a link to my annotated PDF of Tab C from the 4012. Hover your mouse pointer over the red arrows in the PDF to see the text of my annotations.)
A few key points to bear in mind:
Dependents come in two "flavors": qualifying child dependents AND qualifying relative dependents.
1) A qualifying child dependent is ALWAYS the FIRST possibility to check, so use Table 1 in Tab C first.
2) If you determine that the potential dependent is NOT a qualifying child, THEN you should check if the person qualifies as a qualifying relative using Table 2 in Tab C.
3) If the parents of a qualifying child are divorced, separated, or never married, be sure to check Table 3 of Tab C.
Now, after reading all of the above, if you're feeling ready to try Round 1 of the IRS Quiz Game, click on this LINK to go directly to the section with questions on dependents and personal exemptions.
If you're home visiting your family, I'd suggest you have your parents, siblings, and other relatives "play along" and try to answer the quiz questions with you. Past VITA students have told me their family members have learned helpful tax tips while trying the quiz questions along with them.
Everyone can feel free to leave comments and questions below.