Saturday, January 7, 2012

Eighth commandment: Thou shalt beware that not all dependents are created equal!

There are four types of exemptions included in the total number of exemptions on Line 6 of the 1040, but some types of dependents are worth more than other types of dependents.

Beware!  Not all dependents are created equal!
Let's take a closer look at the right hand side of the exemption section of the 1040 to see the different possible types of exemptions.

Personal exemptions for the taxpayer (and spouse, if applicable) go in the top box.

"Qualifying Children" dependent exemptions who lived with the taxpayer go in the second box.

"Qualifying Children" dependent exemptions who did NOT live with the taxpayer go in the third box.

"Qualifying Relatives" dependent exemptions go in the fourth box.

Now, there is EXACTLY one defining thing that ALL people listed on the exemptions section of the return have in common:  each and every exemption listed in Line 6 qualifies the taxpayer to subtract $4,000 from the computation of his 2015 taxable income.  (Updated 2015)

But there are many other types of tax benefits associated with the people listed in Line 6 that differ greatly depending on the category of exemption.  

So--who wins the "Most Valuable Exemption" prize?  Take a guess and then read on to find out:

And the winner is:

Qualifying Children who lived with the taxpayer  win the MVE (Most Valuable Exemption) award!

Let's see why:

Qualifying Child who lived with the Taxpayer gives the following tax benefits to the taxpayer claiming the child:


  1. Dependency exemption of $4,000 subtracted in computing the taxpayer's taxable income
  2. $1,000 Child Tax Credit/Additional Child Tax Credit (if child is under 17)
  3. "Qualifying Person" for Head of Household filing status
  4. Child & Dependent Care Tax Credit (if child is under 13 or disabled)
  5. "Qualifying Child" for Earned Income Credit

Qualifying Child who did NOT live with the Taxpayer
 (due to the special exception for divorced or separated parents) gives the following tax benefits to the taxpayer claiming the child.


  1. Dependency exemption of $4,000 subtracted in computing the taxpayer's taxable income
  2. $1,000 Child Tax Credit/Additional Child Tax Credit (if child is under 17)

Qualifying Relative gives the following tax benefits to the taxpayer claiming the dependent.
  • Dependency exemption of $4,000 subtracted in computing the taxpayer's taxable income
  • "Qualifying Person for Head of Household" (if sufficiently related and other tests are met)
  • Child & Dependent Care Tax Credit (if QR dependent is under 13 or disabled)
Personal exemption:
  • Dependency exemption of $4,000 subtracted in computing the taxpayer's taxable income
  • Child & Dependent Care Tax Credit for taxpayer's spouse (if spouse is disabled)
As you can see, it is very complicated and the consequences of making a mistake could be severe for the taxpayer.  The rules are tricky with many surprising twists and turns--remember that "QC children" are not necessarily young (e.g., if they are disabled) nor are they always the son or daughter of the taxpayer eligible to claim them as their "child"  (e.g., if they live with a grandparent, aunt, big brother rather than with their parents.)   And "Qualifying Relatives" are not always related in the usual sense of the word. 

For my students and other VITA volunteers using TaxWise, please be aware that TaxWise does NOT know what type of dependent you have!  You need to tell TaxWise when you enter the dependent's information in the main info screen.  And you need to be very careful to give it the right information, because you know the old saying--GIGO.   Use your Tab C tables carefully BEFORE you enter any information into TaxWise.

Here is a handy guide:


Now, those of you who have been using TaxWise for a while have probably noticed that TaxWise has a fourth code in the main info screen ("Code 4:  Non-dependents.")   You might be wondering what use it is to enter a person who is not any kind of dependent into TaxWise.    The answer is that if the custodial parent (let's assume it is the mom in this case) allows the noncustodial parent (the dad in this case) to claim the dependent child as his "Code 2 QC" by signing a Form 8332, then she still  retains the remaining tax benefits associated with the child (HoH qualifying person, credit for daycare expenses, and Earned Income Credit), so you would use Code 4 to enter the child in her return.  The child would not show up on the mom's Form 1040 Line 6, but she could show up in other places on the return.   Check out the special exception in my "No King Solomon" post for more information about this situation.

The bottom line:  the greatest tax benefits associated with QC dependent children are available to  parents who LIVE with the children!

If you don't live with the QC, you will NEVER be allowed to claim the EITC associated with the child, nor will you be able to claim HoH filing status based on that child, nor can you claim daycare expenses associated with the child.  This is true even if you are the child's parent and even if you pay for ALL the child's expenses, including daycare, food, clothing, shelter.

No comments:

Post a Comment