Friday, February 11, 2011

No Child Tax Credit For 17 Year Olds? What's The Deal?

If you're confused because you thought you could claim your child as a dependent later than age 16, you're not alone.  This is definitely a common tax misconception.  You CAN still claim your child as a dependent after their 17th birthday ... but the child tax credit is something separate from the child dependency exemption.  In many cases you can qualify for both of these programs!
Here's some additional information that might help you understand this better ...

Claiming Your Child As A Dependent

Most people understand the basic rules, but let's review them just to be sure. 
  • You must provide over half of your child's support, or file a form indicating multiple people shared the support obligation, none of whom provided over half of support and all whom relinquish their dependency claim to you (as one of this group of people helping to provide financial support to the child).
  • With few exceptions, the child must have lived with you over half the year (temporary absence from your home to attend school is one of the exceptions)
  • You can't claim someone as your dependent if someone else (your parents, for example) can claim you as their dependent.
  • If your child is married and they file a joint return with their spouse, the only way you can claim that child as your dependent is if neither your child nor their spouse has any tax liability (meaning the only reason they are filing a tax return is to make a claim for refund of everything that was withheld from them at a job or elsewhere)
  • If your child is over 19 (or over 24 if a full-time student), their income must be $3,650 or less for you to claim them as a dependent.
  • If divorced parents both try to claim their child on their return, and their divorce decree specifically gives the dependency exemption to one of the parents, it is extremely difficult for the other parent to qualify with the IRS to claim it.
  • There are also rules about citizenship, residency, and relationship to you.  Check out IRS Publication 501.  Here is a link to the specific part of that publication that covers the various dependency exemption rules:
  • If in doubt, this is another reason to get qualified help.  Not only do dependency exemptions depend on these rules, but generally the child tax credit, earned income credit, and head of household filing status do as well.  And the IRS is getting much more detailed in questioning doubtful dependent claims, so it is imperative that you get it right from the beginning!
You May Claim Your Child As A Dependent Even If They File A Tax Return
  • Of course, you still need to qualify to claim them under the rules we just discussed.
  • They need to not claim themselves as a dependent.  This is very important.  I have seen countless situations where there was no question that a parent provided over half of a child's support and in every other way qualified to claim them as a dependent, yet the child filed a return claiming themselves thinking they would get a bigger refund this way.  Often the child would have gotten a refund of everything withheld from them anyway.  This action causes the parent's return to be rejected when e-filing, and a long process ensues to correct the situation and get the parent their legitimate refund.  It is so important for parents and children to communicate with each other regarding taxes before anyone files a return.!
What Is The Dependency Exemption Worth?
  • Each exemption generally reduces taxable income by $3,650.  You multiply this by your tax bracket to determine value, for example in the 15% tax bracket, tax is reduced by $3,650 times 15% or $547.50 times the number of exemptions claimed.  In the 25% bracket, it is $912.50 times the number of exemptions claimed, and similar calculations are made for all the other tax brackets.
  • In most cases, each exemption has the further benefit of reducing state tax.
  • If the dependency exemption also qualifies you to file as head of household, this can generate additional tax savings in addition to those already noted.
How Does The Child Tax Credit Work?
  • In general, if the child is your dependent, and did not have their 17th birthday during the year, you will get a child tax credit of $1,000 for that child in addition to the benefit of the dependency exemption already noted.
  • The child must be a US citizen or resident
  • The credit begins to be phased out if your income is higher that $55,000 (married filing separately), $75,000 (single, head of household, or qualfying widow(er)), or $110,000 (married filing jointly)
  • In some cases this credit is refundable, meaning you will receive it even if your tax liability is zero.
Photo credit:  Girl Jumping by Anna Cervova

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