Family and Dependents, Part 3: Further oddities
Read more about family and dependent tax oddities including information on how unrelated people can be qualifying relatives, dependents living in Mexico or Canada, and the rules for dependents claiming dependent tax benefits.
Part one of the family and dependent rules series discusses the variety of tax benefits available to taxpayers with children and other dependents. Taxpayers must have a qualifying child or qualifying relative to claim these benefits. The second part of this series delves into families with more complicated family and dependent situations, including how married people can be treated as unmarried, how the tie-breaker rules work, and an exception to the “no split” rule.
This final part will further venture into family benefit oddities:
- How unrelated people can be qualifying relatives,
- What is available for dependents living in Mexico or Canada,
- Dependents claiming dependent tax benefits.
How unrelated people can be qualifying relatives (and some related people cannot)
The scenario: The following people lived with Jim in his home for all or most of last year:
- His good friend and former college roommate Artie, who lived with him all year
- His first cousin Lily, who lived with him since March; before that, Lily lived with a friend
- His sister Julie, who lived with him since June when she left her boyfriend
Jim supported all these people. Nobody earned more than $4,200 (the gross income limit for a qualifying relative for 2019). Jim would like to claim the $500 credit for other dependents (ODC). You remember Jim from the previous article in this series, right? Can Jim claim the ODC for any of his housemates?
How the law works: Among other requirements, a qualifying relative must be:
- Category one: Related to the taxpayer in one of several ways (such as children, siblings, parents, etc.) or
- Category two: A member of the taxpayer’s household all year.
Note that people in the first category do not have to live with the taxpayer any particular amount of time. People in the second category may be distantly related, or not related to the taxpayer in any way but they must share the same home all year.
Looking at Jim’s three housemates
- Artie is not related to Jim but lived with Jim the entire year.
- Although Lily is related to Jim, she is a first cousin which is not one of the listed relationships in the first category. Nor was she a member of Jim’s household all year. Most of the year doesn’t count.
- Julie is Jim’s sister, one of the allowed relationships in the first category.
Artie and Julie (but not Lily) meet the qualifying relative relationship test. Jim may claim the ODC up to $500 for each (up to $1,000 in all), assuming Artie and Julie meet all the other tests. Under the tax law, Artie is considered to be “related” to Jim and Lily is not, even though Artie is a friend and Lily is a cousin.
Here’s a bonus quirk! Julie, but not Artie, may also qualify Jim for head of household (HoH) filing status. An individual such as Artie who is a dependent only because he lives in the same home with the taxpayer is not a qualifying person for HoH.
What can this taxpayer do? Jim cannot change the way he’s related to his three housemates. If Lily continues to live with Jim for all the following year, she too might be a qualifying relative when Jim files his tax return for that year.
Authority: IRC § 152(d)(2)
Contiguous countries – what, if anything, is still available for dependents in Canada and Mexico
The scenario: In 2017 Pierre, a single taxpayer, Canadian citizen, and U.S. resident, claimed dependent exemptions for his two children whom he supports, Etienne (age 16) and Nicole (age 20). Etienne is in high school and Nicole attends the University of Montreal. Both have individual taxpayer identification numbers (ITINs). What can Pierre claim in 2018 and 2019?
How the law works: Qualifying children and qualifying relatives must be U.S. citizens, residents, or nationals, or residents of Canada or Mexico. Before the TCJA, a dependent in Canada or Mexico had the potential to be a qualifying relative. Taxpayers could claim an exemption for such dependents, as Pierre did.
However, the citizenship test for other dependent-connected tax benefits are stricter. Notably, the child tax credit (CTC), ODC, and earned income credit (EIC) all require the dependent to be a U.S. citizen, resident, or national. Further, the EIC also requires the taxpayer and dependent to live in the U.S.
If a dependent in Canada or Mexico attends an eligible educational institution, taxpayers who pay tuition for dependents may be eligible for one of the education credits.
Finally, unmarried taxpayers who support parents in Canada and Mexico could potentially file as head of household because parents do not have to live with the taxpayer for this filing status.
In this scenario, Pierre cannot claim the CTC or ODC because his children are not U.S. citizens or residents. Note that although the ODC is available for dependents with ITINs, the dependents still must pass the citizenship test. He cannot file as head of household because the children do not live in his home. He may be able to claim one of the education credits if Nicole attends an eligible school.
What can this taxpayer do? Here, there is really nothing that Pierre can change unless his children come to live with him in the U.S.
Authority: IRC §§ 152, 24, 32, 2(b), 25A
Dependents can’t claim dependent tax benefits, except sometimes they can
The scenario: Judy, age 22, lives with her 2-year old daughter, Celia, and her aunt, Fran, age 62. Judy’s income is about $15,000 and she’s a full-time student. She gets support from various sources including her ex-husband, her parents, and even a little from her aunt. Fran’s income is from social security benefits, a small retirement pension, and occasional part-time work. Can Judy claim Celia for the CTC/ACTC and EIC?
How the law works: A dependent of a taxpayer is treated as having no dependents. Although Fran’s income may be pretty low, Judy is her qualifying child and thus her dependent. Importantly here, Fran needn’t supply any particular level of support as long as Judy doesn’t provide more than half of her own support, which she does not.
Under regulations, an individual is not treated as a dependent of another taxpayer if the taxpayer 1) does not have a filing requirement, and 2) does not file a federal tax return except to get a refund of all withheld taxes.
The issue for this household is just how small Fran’s pension and salary are. Are they low enough that Fran has no filing requirement? If so, Judy would not be treated as her aunt’s dependent and would be able to claim Celia for child-related benefits. Or, does Fran have enough income to put her over the filing threshold? In that case, as Fran’s qualifying child, Judy would be ineligible to claim tax benefits for her daughter.
What can the taxpayer do? If it turns out that Fran has a filing requirement, she would be able to claim Judy for several benefits, including the CTC/ACTC and EIC. Also, Fran could possibly claim Celia (her great-niece) for these benefits as well. As a family unit, they could end up with more tax benefits overall than they would have if Judy claimed Celia.
Authority: Prop. Reg. §1.152-1(a)(2)(i)
Unique family and dependent situations? Knowing the rules can help
For extended family living together or multigenerational households, family and dependent tax benefit rules can seem complex. Stay informed on family and dependent rules and other complicated tax issues with our latest Insights or learn more about The Tax Institute.