Back to basics: Family and dependent tax rules, Part One

How the Tax Cuts and Jobs Act made the rules for family and child tax benefits and credits (even more) challenging.

By: Jackie Perlman  /  July 30, 2019

Before the TCJA, taxpayers and practitioners were no strangers to the maze of child or dependent-related tax rules. The rules for claiming an exemption, the child tax credit, and other dependent benefits required taxpayers to have a “qualifying” child or, in some cases, a qualifying relative. While the TCJA suspended claiming personal and dependent exemptions after 2017, the rules for who is a qualifying child are still in effect and are used to determine eligibility for the child tax credit, the new “other dependent credit,” and other family and child tax benefits.

Pre-TCJA, taxpayers could “claim” an exemption for dependents and the child tax credit

Before tax reform went into effect, “claiming” a child or another dependent usually meant that the taxpayer received a dependent exemption for that individual. An exemption is a subtraction from adjusted gross income (AGI) of a set dollar amount – $4,050 for 2017 – per exemption.

For example, a taxpayer in the 25% bracket with two dependent children could subtract a total of $8,100 from AGI in 2017, a potential $2,025 ($8,100 × 25%) in tax savings for the two children. Added to that, the taxpayer – and spouse, if filing jointly – would also get personal exemptions and additional tax savings.

With the TCJA’s suspension of personal and dependent exemptions, these savings are no longer available. But the rules for who is a qualifying child or relative are still very much in play post-TCJA.

All “qualifying child” tests must be met for taxpayers to claim the child tax credit and other child-related benefits

Logically, one might think that dependents are the people that the taxpayer supports financially. While that is often true, it is not necessarily so. Going back further in tax history, the Working Families Tax Relief Act of 2003 (WFTRA) introduced the concept of the “qualifying child.”

A qualifying child must meet specific tests: relationship, age, support, abode, and, if married, the joint return test. Other factors that impact a taxpayer’s ability to claim an exemption include the qualifying child’s U.S. citizen/residency status and whether the child is someone else’s dependent. What is important, and confusing to so many taxpayers, is that the child must “pass” all of these tests with respect to a particular taxpayer to be considered that taxpayer’s qualifying child.

Note especially that the support test for a qualifying child does not require the taxpayer to provide any particular level of support, or any support. Instead, the test requires that the child must not provide more than half of his or her own support.

Suppose Grandma Abby pays most of the support for her 4-year-old grandson, Charlie. She might reasonably assume that he is her dependent. Clearly, the child meets the relationship and age tests and probably meets the joint return and citizenship tests, too. Her support is not even relevant here; presumably, this 4-year old doesn’t provide his own support.

If it turns out that Charlie lives with his own parents, and not with Abby, then it doesn’t matter how much support she provides. Put another way, one of the qualifying child tests, the “abode” test, is not met. If even one test is “failed,” the child is not her qualifying child.

The tie-breaker rules apply to children who may be the qualifying child of more than one person

What if Grandma Abby also lived in the same home with Charlie and Charlie’s parents? Could he still be her qualifying child? Perhaps. WFTRA introduced another set of rules, usually referred to as the "tie-breaker" rules. These are ordering rules that apply in situations such as this one when a child has the potential to be a qualifying child of more than one person in the home. The tie-breaker rules determine who ultimately gets to “claim” the child and whether the “winner” may allow someone else in the home to claim the child instead.

In general, parents have priority for claiming their own children over other relatives’ claims. Under the tie-breaker rule, if a parent can claim a child, but chooses not to do so, another person for whom the child is a qualifying child may claim that child instead. However, that person’s AGI must be higher than the parent’s AGI (or higher than both parents’ AGI, if both could claim the child).

Applying the tie-breaker concept to Grandma Abby, the tie-breaker rules would apply if she lived with the rest of the family because her grandson, Charlie, would potentially be her qualifying child and the qualifying child of his parents. If Charlie’s parents do not claim him, and if Grandma Abby’s AGI is higher than theirs, then Charlie would be treated as her qualifying child and not his parent’s qualifying child. If Abby’s AGI is lower than the parents’ AGI she may not claim Charlie, even if the parents are willing to let her claim him.

Note that the parents do not have to complete any forms to allow Grandma Abby to claim Charlie. They may simply tell her to go ahead and claim him and, most important, do not claim him themselves.

The qualifying relative tests allow taxpayers to claim benefits for dependents who are not qualifying children

What about other relatives? For instance, what if a taxpayer supports a parent or other adult relative or someone who isn’t even related? WFTRA took care of that, too, by introducing another type of dependent: the qualifying relative. Just as with the qualifying child concept, a qualifying relative must meet a series of tests, and meet every one of them.

The rules for each qualifying relative test aren’t quite the same as the rules for the qualifying child tests. For one thing, the list of relationships is far longer for qualifying relatives. For another, the qualifying relative support test is a more “classic” test, requiring the taxpayer to provide more than one half of the individual’s support. One test that trips up many taxpayers is the “not a qualifying child” test. This means if a child is anybody’s qualifying child, the same child cannot also be a qualifying relative of a taxpayer.

Looking again at Grandma Abby, let’s go back to the original scenario in which her grandson Charlie does not live with her. In that case, he is the qualifying child of his parents and cannot be treated as Abby’s qualifying relative, no matter how much support she provides. Again, this is the case even if the parents would like her to claim Charlie.

Post-TCJA, taxpayers must use the qualifying child rules to claim the child tax credit and the qualifying child or qualifying relative rules to claim the new “other dependent” credit

The rules for claiming someone else on a return can be complicated and confusing concepts. Now that the TCJA has eliminated personal and dependent exemptions (more precisely, the exemptions are $0 for 2018-2025), do taxpayers still need to worry about qualifying children and qualifying relatives?

Yes, they do! A taxpayer with a qualifying child or qualifying relative could potentially claim several other dependent-connected tax benefits, even without the dependent exemption. The TCJA modified some of these benefits and also added a new tax benefit. The Qualifying Child Chart also lists the tax benefits covered by WFTRA plus the new credit for other dependents (more on that later).

Each tax benefit on the chart is available for taxpayers with a qualifying child. Some are also available for qualifying relatives. And each has requirements that are different from or in addition to the basic qualifying child or qualifying relative tests.

The child tax credit and the new credit for “other dependents”

The child tax credit is a refundable credit available to a taxpayer with a qualifying child who is under 17 years old at the end of the tax year. The refundable portion of the credit is referred to as the additional child tax credit.

The TCJA added a new rule to qualify for the child tax credit. To qualify, the qualifying child now must have a valid social security number (SSN) in place by the due date of the return.

The TCJA made these changes to the child tax credit amounts for tax years 2018 through 2025:

  • The maximum per child credit is increased from $1,000 to $2,000.
  • The credit phases out (reduces) for taxpayers with AGI of $200,000 ($400,000 for joint filers), increased from the pre-TCJA thresholds of $75,000 ($110,000 for joint filers).
  • The maximum additional child tax credit is $1,400; taxpayers must have earned income of at least $2,500 (decreased from $3,000).

In addition to the higher credit amount, these changes may benefit both higher-income taxpayers, because the phaseout threshold is considerably higher, and lower-income taxpayers because they can now more easily qualify for the additional child tax credit.

The TCJA also introduced a new credit for other dependents. It is a maximum $500 nonrefundable credit for dependents who are not eligible for the child tax credit. The dependent may be a qualifying relative, such as a parent the taxpayer supports, or a qualifying child who has aged out of the child tax credit or has an individual tax identification number (ITIN) rather than an SSN. Note that the child tax credit phaseout mentioned above also applies to the new credit for other dependents.

TCJA added new due diligence rules for taxpayers using the head of household filing status

Head of household filing status is available to unmarried taxpayers who pay more than half the cost of maintaining the home they share with a dependent qualifying child or qualifying relative. (Note: dependent parents do not have to live with the taxpayer for the taxpayer to qualify.)

The TCJA did not change these requirements but did add head of household filing status to the list of tax benefits requiring due diligence on the part of the tax preparer. Due diligence means that the tax preparer asks enough questions to make sure a taxpayer is indeed eligible for a particular tax benefit.  For instance, as due diligence applies to head of household, the preparer must establish that the taxpayer is not married and did, in fact, pay half the costs of maintaining the household for a qualifying dependent.

Other family and child-related tax benefits

The TCJA did not make changes to eligibility requirements or calculations of the earned income credit or child and dependent care credit. Keep in mind, again, that the taxpayer must have a qualifying child to claim the EIC and a qualifying child or qualifying relative to claim the care credit.

Other available tax benefits for taxpayers with dependents include education credits (American opportunity credit and lifetime learning credit), medical expense deductions, and the premium tax credit (PTC). These tax benefits are outside of the group covered by WFTRA rules and some of the rules for claiming them are a bit relaxed. For example, a taxpayer may claim a deduction for paying the medical costs for a married child who “fails” the joint return test but otherwise meets all qualifying child tests. Each tax benefit has its own rules to qualify.

The tie-breaker rules don’t allow splitting family and child tax benefits between two or more taxpayers

Another aspect of the tie-breaker rule (which is still very much in force post-TCJA) is a “no split” concept. That means a child can be treated as a qualifying child of one, and only one taxpayer for all family and child-connected tax benefits in each tax year. If the taxpayer does not qualify for one or more of the tax benefits, then nobody can claim that child-related tax benefit.

Looking again at Grandma Abby, this time we’ll say she lives with the family, does not work, and Charlie’s parents agree that she may claim her grandson. With her income and money contributed to the household, she can file as head of household and claim the child tax credit. Perhaps Charlie goes to daycare for part of the time while his parents work. Abby is not eligible for the child and dependent care credit because the daycare is not connected to her work, one of the rules for the credit. Perhaps the parents’ income is in the earned income credit (EIC) range. They may not claim the credit because they agreed that Charlie is Grandma Abby’s qualifying child and not theirs.

Prior to WFTRA, it was entirely possible to split dependent-connected tax benefits among taxpayers. For instance, one taxpayer could file as head of household and another could claim the EIC. The no-split rule continues to apply under the TCJA.

One final note about the erstwhile dependent exemption. In many ways, it continues to operate behind the scenes. As described above, dependent-connected tax benefits still require the taxpayer to have a dependent, i.e. someone who meets the qualifying child or qualifying relative tests. Also, tax rules that are tied to the dependent exemption amount still use the inflation-adjusted pre-TCJA exemption amount. For instance, the qualifying relative requirements include a “gross income” test which means the potential dependent cannot have income subject to tax that is more than the dependent exemption. Under the TCJA, the gross income test is $4,200 (for 2019), not $0.

Coming soon! Family and Child Tax Benefits, Part 2: Oddities:

  • How a married person can be treated as not married under the tax law
  • How unrelated people can be qualifying relatives (and some related people cannot)
  • How the tie-breaker rule really works
  • An exception to the “no-split” rule for divorced couples
  • Contiguous countries – what, if anything, is still available for dependents in Canada and Mexico
  • Dependents can’t claim dependent tax benefits, except sometimes they can

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Jackie Perlman

Jackie Perlman, CPA, is a principal tax research analyst at The Tax Institute. Jackie specializes in individual taxpayer issues, family tax situations, and tax law complications for families.

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