Tax & Legislation

Claiming Dependents: What Happens When Your Kids Fly the Coop?

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Claiming dependents can provide substantial tax savings. However, kids eventually grow up and need that tax return money for themselves. When should you make the switch, and how much of a change in your tax return should you expect? Here’s what you need to know.

Qualifying Dependent vs. Qualifying Relative

First, it’s important to keep in mind how the IRS defines a qualifying dependent and how that differs from a qualifying relative. A qualifying child (by birth, adoption, marriage, or foster care) must be either under the age of 19 at the end of the tax year or under age 24 at year’s end and a full-time student. Your child must live with you for at least six months of the year. Temporary residence elsewhere for special circumstances, such as staying at a college dorm for education, still counts toward this residency requirement. You must also provide more than 50 percent of your child’s support.

If you can no longer claim your child as a dependent, you may be able to claim them as a qualifying relative, which does not place limits on age. Although a qualifying relative does not have to live in your home as a member of your household, you must provide more than 50 percent of that person’s support. The qualifying relative’s gross taxable income must be less than the amount of the personal exemption deduction ($4,000 for 2015). Nontaxable income, such as Supplemental Security Income or nontaxable Social Security benefits, does not count toward this rule.

The Costs of Losing a Dependent

Depending on your situation, claiming dependents can yield substantial tax savings. These savings—or the loss of them—can be much more significant for a single parent with one child. Here’s an example from this year’s tax filing season:

A 22-year-old lived with her mother for the entirety of 2013 and 2014. In 2013, she was a full-time student and earned $6,000 in wages, but her mother provided more support. Her mother filed as head of household for tax year 2013 and was able to claim her daughter as a dependent.

In 2014, the daughter earned more than $6,000 and was only a part-time student. Her mother had planned to claim her daughter as a dependent again, but because her daughter was neither a qualifying child (not a full-time student) nor a qualifying relative (taxable income of more than $3,950), she could not, nor could she file as head of household.

The loss of this filing status and dependency exemption deduction cost $2,700 in federal income taxes plus $1,850 in New Jersey state income taxes—a total of $4,550!

It doesn’t take much to lose a dependent. In another example, a 27-year-old lived with her parent for the entire year and received more than half of her support from that parent. But because she earned just $22.00 in wages over the gross taxable income limit, her parent could not claim her as a dependent or file as head of household.

Seeing your child go out into the world to make a living is an exciting time, but it’s important to plan ahead and look for other ways to save on taxes once you no longer can claim them as a dependent. Try to stay positive, even in the face of a significant loss of income—in the end, your loss is your child’s gain.

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Robert D Flach has been preparing tax returns for individuals in all walks of life for over 40 years.  He has been writing the popular tax blog "The Wanering Tax Pro" since Jun of 2001.  He is the resident 1040 expert for MainStreet.com, and also writes for the National Association of Tax Professionals and the organization's New Jersey chapter newsletter.Mr Flach attempts to translate the US Tax Code for the average middl-class taxpayer, providing tax planning and preparation avdvice and information.