Who is Your Child? The answer can help you or hurt you.
We are probably most aware of children being tax benefits…qualifying us for exemptions, head of household status and earned income credits. But having the IRS consider a person as your child can also have its disadvantages, as when his or her investment income must be taxed at your, higher, tax rate. Thus it is important to know the IRS cut-off points, which are not at all consistent.
We, for instance had an unpleasant surprise regarding the qualified widow status. A client is raising her grandson as her own son, but she has not formally adopted him. Though he is a dependent, he is not her “child or stepchild”, hence she must use “head of household” and not the more beneficial “qualifying widow” status.
As a reminder, there are five tests to determine if a person is a “qualifying child”: the relationship test, the age test, the residency test, the support test and the no joint return test. We will not describe them in detail here, because they are easy to look-up (in IRS Pub 17, for instance). Generally, if your child meets these tests, you may claim him or her as a dependent, you qualify for the head of household status, and you qualify for the earned income credit. One minor glitch: if you are younger than your “qualifying child” (e.g. your brother or your nephew), you cannot claim the earned income credit.
You may think your 13 year-old child should still have adult supervision; yet turning 13 is the cut-off year for claiming credit for after-school care (unless your child is disabled).
Forms 8814 and 8615 have different cut-off ages. If your child is under age 19 at the end of the year, you may include his or her investment income on your return (with form 8814). If he or she is under age 18 you must include his or her investment income exceeding $1900 on form 8615 (or form 8814, if you so elect). For children who are full-time students their income is subject to your rates until they reach 24. “Your child” for these rates includes your legally adopted child or stepchild; he does not have to be your dependent. As with the qualifying widow example, grandchildren, siblings, nieces and nephews do not count, even if they are “qualifying children” by the tests named above.
Also not every “qualifying child” makes you eligible for the child tax credit. Here the cut-off age is 17 and Uncle Sam couldn’t care less if he or she is a full-time student.
We could go on and on about kidnapped children, stillborn children, and children of divorced parents. In short, just because you regard and care for someone as your child, it doesn’t necessarily mean that Uncle Sam shares your view. Our clients often look to us for quick estimates of their projected taxes; and our advice can only as good as our assumptions. Just knowing that the question “who is my child for tax purposes?” is not so simple can be evidence of your expertise.
For reference: IRS Publication 17, “Your Federal Income Tax”; IRS Publication 929 “Tax Rules for Children and Dependents”
Velin & Associates, Inc’s dedicated staff is here for you to answer any questions you might have about the above topic or any other question you might have. We value each and every client and we are always glad to be of service to our new clients. We will assist you in taking advantage of the all deduction available to you.
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