 Income tax 2023-2024, who qualifies as your dependent definitions and special rules. Get ready and some coffee because we're setting our refund to the max with income tax preparation 2023-2024. First, a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers, they don't want to be seen with us. But that's okay, whatever, because our merchandise is better than their stupid stuff anyways. Like our, trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant. Because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Most of this information can be found in the line instructions section of the form 1040 instructions, tax year 2023, which you can find on the IRS website at irs.gov, irs.gov. Looking at dependence, remembering that every time we look at a particular item for income taxes, we want to visualize the income tax formula and think about the primary line items that would be affected from it. And then think about the residual effects of the changes to those line items on the income tax formula. When we're thinking about dependence, the primary line items are generally the credits down below. So if we have a single taxpayer who has a dependent, then they might get a child tax credit, which could have a refundable portion to it possibly or other dependent credit. However, there also could be changes to filing status. For example, going from single to head of household could be largely dependent on a dependent. And that could affect the standard deduction as well as the tax rates. Now we talked about dependence in a prior presentation, usually like with the filing statuses. It's pretty straightforward to determine if someone is a dependent or not. But sometimes we have that gray area. We talked about the general questionnaire last time. Now we'll talk about some of those gray areas that we can expand upon. And those are things that you can do further research if you find a question as to whether someone qualifies as a dependent or as a qualifying child versus a dependent. So remember the general process would be, do they qualify as a qualifying child? Because if they do, then you're looking to see if you can get the child tax credit, which would be a higher benefit than not having a child tax credit. If they don't qualify for the child tax credit, then you're seeing if you can get the other dependent credit. On the Form 1040, we can see that the dependents are listed down here. Name, social security number, relationship, and then checking the benefit that we're going to get, which we'll be showing on page two of the Form 1040, either the child tax credit typically or the credit for other dependents. And then on page two, we've got the tax calculation, which could be impacted the child tax credit up top. And then you could have a refundable portion of it down below as well. Okay, again, these are some of the additional factors. So if you want to take a look at the general thought process for whether or not someone qualifies as a dependent, look at the prior presentation. Now we're expanding on some of the definitions that you might need to drill down on in special situation. All right, so an adopted child. As we saw before with the filing statuses, an adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption. Adoption, a taxpayer identification number, otherwise known as the ATINs. So if they're adopted, we know that of course you need the number, social security number, or at least some kind of identification number. If they're adopted, that means you might have an adoption taxpayer identification, an ATIN, A-T-I-N. So if you have a dependent who was placed with you for legal adoption and you don't know the dependent's SSN, you don't have their social security number, you must get an ATIN for the dependent from the IRS. You can see Form W7A for details if the dependent isn't a U.S. citizen or resident alien, apply for an ITIN instead using Form W7. Children of divorced or separated parents. Now here's where the messiness often comes in because the child, the children often have a significant impact as we can see on the tax return. So who can claim the children for taxes can become a point of contention, which is something that would be best to set up as soon as possible instead of kind of fighting over it at the point of time when you're actually filing the tax returns, which could be a messy situation. So a child will be treated as the qualifying child or qualifying relative of the child's non-custodial parent defined later if all of the following conditions apply. Number one, the parents are divorced, legally separated under a written separation agreement or lived apart at all times during the last six months of 2023 whether or not they were married. Number two, the taxpayer received over half of the child's support for 2023 from the parents and the rules on multi-support agreements later don't apply. Support of a child received from a parent's spouse is treated as provided by the parent. Three, the child is in custody of one or both of the parents for more than half of 2023. Number four, either of the following applies. A, the custodial parent signs form 8332 or a substantially similar statement that they won't claim the child as a dependent for 2023 and the non-custodial parent includes a copy of the form or statement with their return. If the divorce decree or separation agreement went into effect after 1984 and before 2009, the non-custodial parent may be able to include certain pages from the decree or agreement instead of form 8332. You can see publication 1984 and pre-2009 decree or agreement and post-2008 for more details there. And then B, a pre-1985 decree of divorce or separate maintenance or written separation agreement between the parents provides that the non-custodial parent can claim the child as a dependent and the non-custodial parent provides at least $600 for support. Okay, so how, when would this possibly take place? Now note that if you're looking at who is going to basically get the benefit of the child on the tax return, it's usually going to be the custodial parent, meaning the parent that the child is living with. However, you can imagine situations where the parent who this child is living with might not get the biggest tax benefit from them living there because possibly they're already head of household, for example. And maybe they don't have a lot of income and maybe it's not going to have an impact on their earned in credit or child tax credit, therefore, because you're only getting the refundable portions of them or something like that. And in that case, you can kind of imagine that the non-custodial parent might have a bigger overall tax benefit if they were able to basically claim the dependent. So you might have a situation where you would like the non-custodial parent to basically be claiming the dependent. And these are types of things that would be best worked out in a divorce or separation or custody kind of agreement, taking into consideration these somewhat complex tax consequences so that they can be worked out, you know, not again before actually filing the tax returns, right? So if that applies, you can drill down deeper into that. If you're looking at someone who is in a divorce situation as a taxpayer, you know, the question is how much detail do you want to get in on a divorce situation? You can basically go over the tax law and then of course the lawyers are going to be the ones that are going to be hashing out any kind of divorce agreement who hopefully will take into consideration tax situations. Okay, so if conditions one through four apply, only the non-custodial parent can claim the child for purposes of the child tax credits and for credit for other dependents like 19 and 28. However, this doesn't allow the non-custodial parent to claim head of household filing status. So here we've got a separation between these two conditions as to whether they're going to qualify for head of household or not, which I mentioned a second ago, which could be something that is largely dependent upon dependents, but in a situation where the non-custodial parent is basically claiming the child, possibly they can get access to the child tax credit, but might not be able to consider that child in terms of support for the head of household. So again, kind of a sticky or kind of a confusing situation, which could often happen in these kind of weird situations where you have this custody claims for the dependents. So the credit for child and dependent care expenses, the exclusion or dependent care benefits or the earned income credit. So all of these often have impacts from whether or not you have a dependent. And again, if you're in this kind of weird situation where you're the non-custodial parent, you might not get the same benefit as you were if you were the custodial parent with a dependent on the form. So once again, however, this doesn't allow the non-custodial parent to claim head of household filing status, which would the credit for child and dependent care expenses, not the child tax credit. This is a different credit. The exclusion for dependent care expense benefits or the earned income tax credit, which is another huge refundable credit, which depends largely on the number of dependents, which we'll talk about later. So the custodial parent or another taxpayer, if eligible, can claim the child for the earned income credit. So that's an interesting situation because again, you can imagine the one that's taking care of the child, if they would still possibly want the child to be claimed for the earned income credit because even if they don't have any income, that could be a significant benefit to them because they won't be paying tax but could participate in kind of the welfare type of benefit program, can claim the child for the earned income credit and these other benefits. So again, if this is a situation you're in, you can take a look at Publication 501 to drill down on more detail to make sure to get that straightened out. Custodial and non-custodial parents. So what does that mean? The custodial parent is the parent with whom the child lived for the greater number of nights in 2023. So if there is a dispute about a child as to which tax return they can be on, usually the breaking factor would be who did the child live longer with because the assumption would be that they're the ones that are taking care of the child, but now we're looking at this situation where you have the non-custodial parent. So the custodial parent being the one that they lived with most of the time. So the custodial parent is the parent with whom the child lived for the greater number of nights. The non-custodial parent is the other parent. Now obviously again, this gets kind of ugly because if it's a split down the middle, you would think it would be even, that's how a lot of divorce systems might work, and then if you were to try to prove the number of nights you might actually track the number of nights and whatnot and try to say that and document it and all that kind of stuff. So if the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income. Now some people see that as not fair. Why would you give the child benefit at the tiebreaker to the one with the higher income? Well probably because that's the one that's going to be providing more of the financial benefits. So and possibly it's the one that maybe is going to have a higher tax benefit from it, although with the refundable credits that may not always be the case, right? So you can see publication 501 for the exception for a parent who works at night, rules for a child who is emancipated under state law and other details. Okay post 1984 and pre 2009 decree or agreement, the decree or agreement must state all three of the following. The non custodial parent can claim the child as a dependent without regard to any condition such as payment of support. So we have these condition like is the thing conditional on support payments, which you would think would be like alimony or something like that. The other parent won't claim the child as a dependent. So obviously in these agreements, the whole point is that you've worked out who's going to get the tax benefit from the child to best benefit everybody involved so that not both parents will will be reporting the same child on the tax return, which will of course cause problems into the future because the iris will see two social security numbers and they'll then come they'll they'll be a blowback on that like for sure. So the years for which the claim is is released. Okay, the non custodial parent must include all of the following pages from the decree or agreement. So the cover page include the other parents social security number on that page. The pages that include all the information identified in one through four above signature page with the other parents signature and date of agreement post 2008 decree or agreement. So now we're after laws change. And as the law changes, then sometimes they're going to of course be able to say well, whatever it was prior to that law change, we're going to try to keep it the same because you've already made contractual agreements based on tax law prior to that point. This is what's difficult with tax law because oftentimes you can't change it retroactively. You have to change it from one point going forward. So now we're talking post 2008 decree or agreement. So if the divorce decree or separation agreement went into effect after 2008, the non custodial parent can't include pages from the decree or agreement instead of form 8332. So they have to have a form 8332 generally. So the custodial parent must sign either form 8332 or substantially similar statement. The only purpose of which is to release the custodial parents claim to certain tax benefits for a child and to non custodial parent must include a copy with their return. The form or statement must release the custodial parents claim to the child without any conditions. For example, the release must not depend on the non custodial parent paying support. So release of certain tax benefits revoked a custodial parent who has revoked their previous release of a claim to certain tax benefits for the child must include a copy of the revocation with their return. So now they got something got mad, they got a new lawyer and the new lawyer said, what are you doing for crying out loud? So then they revoked it. So for details you could see form 8332 for that one. So exception to citizen tests. So now we saw that there was a citizen test. And again, that's another area where you could find great points that you do further research on. So if you are a U.S. citizen, a U.S. national and your adopted child lived with you all year as a member of your household, that child meets the requirement to be a U.S. citizen in step two. Question one, step three, question two, step four, question two, and step five, question two, which are all basically the same questions in our questionnaire that we talked about in a prior presentation. So exception to gross income test. So if your relative, including person who lived with you all year as a member of your household is permanently and totally disabled, defined later, certain income for service performed at a sheltered workshop may be excluded for this test. So again, we saw that there was a gross income test to some of the question points to see whether they qualify as a dependent. So you could have an exception to some of those items in certain situations. Exception to time lived with you. So we saw that we, for example, they had to live with you for half the year and whatnot. And again, you can imagine scenarios where they didn't live with you for half the year for weird things where they would have lived with you for half the year. And does that count to be allowed to have them as a dependent? Okay, let's check it out. Temporary absences by you or the other person for special circumstances such as school, vacation. So they were at school, they went on vacation, but they still would have lived with me if I didn't send them off to vacation. It's a mandatory vacation. Get that kid on vacation. Business, medical care. So they were in the hospital. They would have been home, but they were gone for medical care. Military service or detention in a juvenile facility. They were in juvie. What do you want me to do? They would have been home, but they were in juvie. Okay, so they all count as time the person lived with you. So also see children of divorced or separated parents earlier or kidnapped child later. So if the person meets all other requirements to be your qualified child but was born or died in 2023, the person is considered to have lived with you for more than half of two. So now you have a situation. You have the child, they lived with you, but you're saying more than half the year, but the child died in 2023. Well, that's going to make it harder for them to say they lived with you for more than half the year. Do you have to carry the ashes in your living room until you put them for part of the year? Well, no. So that circumstance, what do we have to do? Well, so if the person meets all the requirements to your qualified child but was born or died in 2023, the person is considered to have lived with you for more than half of 2023. If your home was this person's home for more than half the time the person was alive, which makes sense, right? So now they were alive half the year and so they lived with you more than half the time of the time they were alive. Okay, so if the person meets all the other requirements to be your qualified child but you adopted the person in 2023, the person was lawfully placed with you for legal adoption by you in 2023 or the person was an eligible foster child placed with you during 2023, the person is considered to have lived with you for more than half of 2023 if your main home was this person's main home for more than half the time since the person was adopted or placed with you in 2023. Any other person is considered to have lived with you for all of 2023 if the person was born or died in 2023 and your home was this person's home for the entire time the person was alive in 2023 or if you adopted the person in 2023, the person was lawfully placed with you for legal adoption by you in 2023 or the person was an eligible foster child placed with you during 2023 and your main home was the person's main home for the entire time since the person was adopted or placed with you in 2023. Okay, foster child. So a foster child is any child placed with you by an authorized placement agency or a judgment decree or other order of any court of competent jurisdiction so they have the right to be able to do that. So kidnapped child. So if your child is presumed by law enforcement authorities to have been kidnapped by someone who isn't a family member you may be able to take the child into account in determining your eligibility for head of household or qualifying surviving spouse filing status. Now hopefully this would be a tragic situation but from a tax perspective the kid was kidnapped so then again you could have significant impacts if you were to claim the child or not which could include moving from single status to head of household so what do you do about that and so on. So child into account and determine your eligibility for head of household or qualifying survivor spouse filing status the child tax credit again that's the other big one the credit for other dependents if they didn't qualify for the child tax credit the earned income tax credit could have a big significance if you have a child for that one for details you could see publication 501, publication 596 for the earned income tax credit. So married person if the person is married and files a joint return you can't claim that person as your dependent why because they're married if they're married you would think they're on their own at that point in time however there might be exceptions to that situation so however if the person is married but doesn't file a joint return or files a joint return only to claim a refund of withheld income tax or estimated tax paid you may be able to claim that person as a dependent so they're married but if they weren't married you would generally be able to claim them as a dependent they're still in essence dependent upon you is the scenario but they and they wouldn't even have filed a return but they did a little bit of work last year and they got W-2 income the employer withheld income from the W-2 income and the only way for them to get that money back was to file a return and that's the only reason they filed then maybe you still could claim them as a dependent even though they're married and file a married filing joint return so unusual situation but if that applies you can see publication 501 for details and examples and that case go to step 2 question 3 for qualifying child or step 4 question 4 for qualifying relative alright multiple support agreements so if no one person contributed to over half the support of your relative so now you've got this kid there's usually a support test where one person has to give more than half the support for the kid to qualify but now you've got multiple people that are supporting this kid and that means that none of them are meeting the support test because instead of having just like one person supporting them or one tax entity you've got multiple tax entities none of which provide more than half the support well you can't just lose the benefits from the credit from the kid what good is the kid if no one gets any tax benefit from them someone's got to get it in that situation so what do you do so if no one person contributed over half of the support of your relative or a person who lived with you all year as a member of your household but you and another person's provided more than half of your relative support special rules may apply that would treat you as having provided over half of the support okay someone's got to be able to claim this person right for details on that you can see publication 501 permanently and totally disabled a person who is permanently and totally disabled if at any time during 2023 that person can't engage in any substantial gainful activity meaning they can't work generally because of physical or mental condition and a doctor has determined that this condition has lasted or can be expected to last continuously for at least a year or can be expected to lead to death that's what permanently and totally disabled what is so we saw that that condition was for example in one of the age tests for a qualifying child so again you have to get into the details what exactly does that mean right because so public assistance payments if you receive payments under the temporary assistance for needy families the TANF program or other public assistance program you used the money to support another person in that case you can see publication 501 alright qualifying child of more than one person so now you've got this child where usually you go through that questionnaire only one person would qualify but now you've got a child that could potentially qualify for more than one person you can't put the same child on multiple returns only one person gets the tax benefit of that kid so we've got to say who's going to who's going to get it so even if a child meets the conditions to be the qualifying child of more than one person only one person can claim the child as a qualifying child for all the following tax benefits unless the special rule for children of divorced or separated parents describe earlier applies so you've got the child tax credit and credit for other dependents line 19 and the additional child tax credit you can't have two people claiming those credits for one social security number for one kid right that kid you know the kid only has so many virtues right which are tax benefit virtues so you can't like so head of household you can't have two people go and say from single to head of household changing their and upgrading their filing status based on a dependent which is the same dependent credit for child and dependent care expenses so we haven't talked about that credit yet but if you have child and dependent care you can't have those on two tax returns and so exclusion for dependent care benefits that's form 2441 part 3 and the earned income credit which we'll talk about later largely dependent upon the number of dependents you can't be claiming multiple dependents to get this refundable credit which is quite substantial that's based largely on the number of dependents you can't have that same dependence on multiple returns or things would get crazy so no other person can take any of the five tax benefits just listed based on the qualifying child so if no other person can take any of the five tax benefits just listed on the qualifying child if you and any other person claim the child as a qualifying child the following rules apply for purposes of these rules the term quote parent end quote means a biological or adoptive parent of an individual it doesn't include a step parent or foster parent unless that person has adopted the individual so if only one of the persons is the child's parent the child is treated as the qualifying child of the parent that would seem somewhat logical in that case so if the parents file a joint return together and can claim the child as a qualifying child the child as treated as the qualifying child of the parents so obviously if the parents are married then they would be on the filing joint return you would think if the parents don't file a joint return together but both parents claim the child as a qualifying child the IRS will cheat the child as the qualifying child of the parent with whom the child lived for the longer period of time so that's the tie breaking factor if you find yourself in this situation typically two people saying this child qualifies for them you've got joint custody situation both of them are wanting to claim the taxes if you both put the social security number on your returns the IRS will most likely question those returns and then you're gonna have to log in the number of days and say this kid lived with me longer than that deadbeat over there and then you could and then you could go from there and try to figure it out but again it would be nice to have that figured out before that point in time also realize that if you file a tax return whoever files first the tax return might go through more likely because the social security number has not yet been recognized the second person to try to claim the child might get a kickback of the return from the e-filing status the IRS claiming that it's already been claimed in which case you might say well yeah but they claimed it incorrectly so you might then try to paper file the return so that you make your claim legitimately which could delay the refund and again gets you into this kind of battle which again could delay refunds and usually benefits lawyers so if the child lived with each parent for the same amount of time the IRS will treat the child as the qualified child of the parent who had the higher adjusted gross income AGI everything else equal AGI for the higher person is the tiebreaker why because that's probably the person who is providing the support for the child in terms of financial support at least so if no parent can claim the child as a qualified child the child is treated as the qualified child of the person who had the highest AGI adjusted gross income for 2023 same rationale if a parent can claim the child as a qualified child but no parent does so so claim the child the child is treated as the qualified child of the person who had the highest AGI for 2023 but only if that parent's AGI is higher than the highest AGI of any parent of the child who can claim the child alright example this would be helpful your child J meets the conditions to be a qualified child for both you and your parent J doesn't meet the conditions to be a qualified child of any other person including J's other parent so under the rules just described you can claim J as a qualified child for all of the five tax benefits just listed for which you otherwise qualify for your parents can't claim any of those five tax benefits based on J however if your parents AGI is higher than yours and you do not claim J as a qualified child J is the qualified child of your parent ok so let me see if I can break this down a bit we've got J here is the child it's between you the parent and your parents right and the other spouse we're saying is out of the picture because the kid J doesn't qualify for the other parent so it's between you and your parents now obviously if you want to claim the child then you would think that it would go to you because you're the parent however you can imagine a situation where maybe it would be more beneficial that your parents would claim the child since he also qualifies under them as well so if you don't claim the child as a dependent that would be no one has claimed the child as a dependent and your parents then since they still qualify and you didn't take the qualification as the first one to be able to possibly they can take the child as a dependent as you can imagine from tax planning standpoint there could be scenarios where that might be the most beneficial thing to happen so for more details on something like that you can look at examples you can see publication 501 if you have those kind of complex examples and you want to do some possible maybe there's some ability for some tax planning in there as well ok