For much of our history, most Americans lived in family units consisting of two parents, married to each other, with one or more dependent children all living together under the same roof. For families living in those times, many things were simpler, including the ability to decipher the tax code and file an accurate tax return.
Today, a lot has changed, including the makeup of the typical American family. In fact, more than half of all children today will spend some time growing up in a non-traditional family structure such as with a single parent, a relative or a co-habiting couple.
And all of this makes figuring out who qualifies as a dependent for tax purposes all the more difficult – yet more important than ever.
In a study published last year by Elaine Maag, H. Elizabeth Peters and Sara Edelstein of the Tax Policy Center (http://tpc.io/205osO4), the authors found that “over 90 percent of all families with children benefited from the earned income tax credit (EITC), the child tax credit (CTC), the dependent exemption, head of household filing status, or the child and dependent care tax credit.”
The basic problem is that many of us may not know whether we qualify for these benefits because we may not know who in our family qualifies as a dependent. Yet qualifying for these benefits can spell the difference between owing money and receiving a refund.
Like so much of the tax code, the devil is in the details.
The IRS rules for qualifying dependents cover just about every conceivable situation, from housekeepers to emancipated offspring. Moreover, the multiple definitions of dependent, including five different definitions of child alone, are confusing and even in some cases conflicting. This makes it hard for taxpayers to do the right thing.
Determining if someone is a “qualifying child” for purposes of claiming an exemption is complicated. A taxpayer must be able to answer “yes” to all of the following questions:
- Are they related to you? The child can be your son, daughter, stepchild, eligible foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, adopted child or an offspring of any of them.
- Do they meet the age requirement? Your child must be under age 19 or, if a full-time student, under age 24.
- Do they live with you? Your child must live with you for more than half the year, but several exceptions apply.
- Do you financially support them? Your child may have a job, but that job cannot provide more than half of her support.
- Are you the only person claiming them? This requirement commonly applies to children of divorced parents.
If a dependent doesn’t meet the definition of a “qualifying child” a taxpayer still may be able to claim him as a “qualifying relative.” The test for “qualifying relative” is also complicated.
- Do they live with you? Your relative must live at your residence all year or be on the list of “relatives who do not live with you.” About 30 types of relatives are on this list.
- Do they make less than $4,050 in 2016? Your relative cannot have a gross income of more than $4,050 in 2016 and be claimed by you as a dependent.
- Do you financially support them? You must provide more than half of your relative’s total support each year.
- Are you the only person claiming them? This means you can’t claim the same person twice, once as a qualifying relative and again as a qualifying child.
In her 2016 Annual Report to Congress, Nina Olson, the Internal Revenue Service National Taxpayer Advocate, said, “The tax code’s family status provisions continue to ensnare taxpayers and make tax administration difficult simply because of the number of such provisions and their structural interaction. These provisions include filing status, personal and dependency exemptions, the child tax credit, the earned income tax credit, the child and dependent care credit, and the separated spouse rule.”
To simplify these provisions and definitions, Ms. Olson has recommended that, “as part of a comprehensive reform of the tax code’s tax treatment of families, Congress consolidate the numerous existing family status-related provisions into two categories: (1) a Family Credit and (2) a Worker Credit.”
The immediate benefit of Ms. Olson’s recommendations would reduce the need to keep records of where children sleep or reside while also reducing the amount of information and “checklist” tests needed to qualify for important credits or benefits.
At Intuit, we have long advocated for tax simplification. Simplifying the convoluted and confusing definitions of dependent would be a great place to start. The tax code should be simple enough so average taxpayers can easily understand their eligibility for deductions and credits. This sort of simplification would empower taxpayers to better understand these tax benefits, reduce improper payments, and promote financial literacy for millions of Americans.