You've learned a little about who's related to you FOR TAX PURPOSES in the last article: Who's Your Dependent Part 1, and this edition is going to re-visit those relationships and expand on how they apply to your tax return. You'll be introduced to child dependents, which will be the focus of Part 3: Qualifying Children.
First, let's look at the relationships (FOR TAX PURPOSES). Keep in mind, these relationships can be more complex than they initially appear. This is how the Internal Revenue Service defines relatives:
"A person related to you....(includes)
Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.)
Your brother, sister, half brother, half sister, stepbrother, or stepsister.
Your father, mother, grandparent, or other direct ancestor, but not foster parent.
Your stepfather or stepmother.
A son or daughter of your brother or sister.
A son or daughter of your half brother or half sister.
A brother or sister of your father or mother.
Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
Any of these relationships that were established by marriage are not ended by death or divorce" (IRS Pub 17, p. 33)
We can split our relatives into 2 categories. First is your children, or those who are represented on the left side of the tree in figure 1. Second are your extended family, or those who are represented on the right side of the tree in figure 1.
It is helpful to think of your tax lineage as a tree (see figure 1). You (and your spouse) are the trunk. Your branches are your realatives. Let's define each branch of your tree.
Your children include the 3 branches on the left side of the tree:
Your Children who are naturally born to you and/or your spouse, those legally adopted by you and/or your spouse, as well as foster children who have been placed in your care by the government.
Your Grandchildren who are naturally born to your child, those legally adopted by your child, as well as foster children who have been placed in your child's care by the government.
Your Great-Grandchildren who are naturally born to your grandchild, those legally adopted by your grandchild, as well as foster children who have been placed in your grandchild's care by the government.
In order for a child to be your qualified child dependent they must meet this criteria. Do NOT include the children of a domestic partner to whom you are not married that are not also your natural children, or any other children who are no specified here.
There are additional tests that must be met to claim the relatives in this category as dependents. See Part 3 for additional information regarding child dependents.
Your extended family includes the 5 branches on the right side of the tree.
Your Parents: your and/or your spouse's mother, step-mother, & mother-in-law, father, step-father, & father-in-law.
Your Grandparents: the direct ancestors (parents, grandparents, etc.) of your and/or your spouse's parents (defined above).
Your Aunts & Uncles: brothers and/or sisters of your and/or your spouse's parents (defined above).
Your Siblings: the children of your and/or your spouse's parents who are naturally born to both/either of your parents, and those legally adopted by both/either of your parents. Your siblings may also be your qualified child dependent (more on this in Part 3).
Your Nieces & Nephews: the children of your siblings who are naturally born to your and/or your spouse's siblings, and those legally adopted by your siblings. Your nieces and nephews may also be your qualified child dependent (more on this in Part 3).
There are additional test that must be met to claim the relatives in this category as dependents. They are the similar to the tests that Qualifying non-related dependents must meet (See Part 1).
The relative is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico. Certain adopted children are excluded from this test.
Contact a professional for more information.
The relative is not filing a MFJ tax return
You can claim your child who files a joint tax return if they have no tax liability and only file to claim a refund.
The relative's gross income is under the exemption amount for the current year.
In 2014 the exemption amount is $3950. This amount changes each year. Check with a tax professional for updated amounts.
You provided more than 1/2 of the relative's support
You have to examine where the relative's financial support comes from to determine if it is considered provided by them or not. Payments that are not considered provided by the relative include (not limited to) scholarships, food stamps, & welfare payments. Social security payments ARE considered provided by the relative. Use the support worksheet to help determine if you meet this test. You may need a multiple support order when you are not the only one contributing to the relative's support. Contact a tax pro for more info.
In order to be your qualifying relative, the person cannot meet the tests to be a qualifying child for you or any other taxpayer. (See Part 3 for add'tl info on qualifying children). Qualifying relatvies in this category do not need to live with you for the entire year. To be a qualifying child your child must meet the residency test described in Part 3.
You now have the details on who qualifies as your dependent. Part 3: Qualifying Children will expand on the additional tests to be a qualifying child and what tax benefits are related to qualifying child dependents.
You should call a tax professional to be guided through the process if you need help. The information in this article is for informational purposes only, and should not be used as express advice for any one particular individual's tax decisions exclusively. You should always consult your tax advisor as all individuals have unique tax puzzles and the pieces are never the same.