Dependent

A dependent is a qualifying child or relative, other than a spouse or the taxpayer, who relies on the taxpayer for financial support. This makes them eligible for certain tax benefits. Claiming dependents can provide tax credits and deductions, such as the Child Tax Credit or the Earned Income Tax Credit, for those who care for them.

They must meet certain tests stipulated by the Internal Revenue Service (IRS), such as relation, support, joint return, residency, gross income, not claimed as qualified by many tests, and age test for getting qualified as dependents. Moreover, they must be U.S. citizens, U.S. nationals, or resident aliens. They can also include Canadian or Mexican residents, provided they live with the taxpayer.

A dependent is defined as a person other than a spouse who gives the taxpayer the opportunity to claim dependency exemption from income taxes. The person can be anyone who qualifies as a dependent child or relative beyond the taxpayer's immediate family as long as they meet the IRS criteria, such as specific relationship or residency requirements. This allows the taxpayer to claim tax credits or deductions based on that relationship. These persons' relationships and situations allow one to claim tax benefits. They get tax benefits per claiming these dependents, such as tax deductions and tax credits under the Dependent Care Flexible Spending Account (DCFSA). Moreover, the dependent care FSA limit for 2024 is set at $5,000 for couples filing jointly and single filers and $2,500 for married couples filing separately.

Tax dependents must meet specific criteria such as relationship, income, support, and residency, as defined by the IRS, with slight differences between qualifying relatives and children. This has implications like lower tax liability and/or access to tax credits, which prove monetarily advantageous to taxpayers who give financial support to children, disabled, and elderly members or relatives. Utilizing these benefits allows taxpayers to increase their tax benefits, leading to tax savings and credits and increasing their savings in return.

These dependents are crucial elements of a family and individual's financial decisions and budgeting. The dependent care credit also contributes to overall financial well-being by allowing taxpayers to access various tax benefits through careful filing and planning.

Certain tests must be fulfilled for one to qualify as a dependent, either as a child or relative.

For a qualifying child as dependent, a person has to fulfill the below criteria:

• Relationship test: A person has to be the child, stepchild, step-sibling or sibling, foster child, or descendant of a taxpayer.
• Age test: The person must be under 18 years old at the close of the tax year or be fully physically disabled. Alternatively, they can be a full-time college student under 23 years old and younger than the taxpayer.
• Residency test: The individual must stay more than a six-month tax year except for vacation, education, illness, death, or birth during the financial year.
• Support test: The individual must receive under half the taxpayer’s annual help.
• Joint return: The individual must never file a joint return for the current financial year.

For a qualifying relative, the following criteria are to be met:

• Not a qualifying child of taxpayer test: The individual must not be the taxpayer's child or the child of another taxpayer.
• Relationship or member of household test: The individual should reside as a household member of the taxpayer and be related as a sibling, nephew, niece, child, or brother-in-law.
• Gross income test: The individual must have less than $5500 as gross salary for 2024, except if the disabled person earns from a sheltered workshop.

Let us use a few examples to understand the topic.

Example #1

Let us assume that Diana is the sole earning member of her family. She has two daughters, aged 10 and 12 years. In addition, Diana has to care for her father, who has no earning source. He doesn’t file any income tax return singly or jointly. She has been providing more than half of the financial support to all three dependents.

As per the IRS test, her daughters and her father meet all the criteria to qualify as legal and valid dependents. Hence, Diana can claim dependents on her income tax filing. This allows her to benefit from tax credits and refunds, such as child tax credits, by reducing her taxable income based on her income and with holdings.

Example #2

An online article published on November 15, 2023, discusses the new scheme called the Dependent Care Flexible Spending Account (DCFSA) and its benefits to serving military personnel. It states that all eligible members could sign up for the DCFSA scheme from mid-November to mid-December to contribute a maximum of $5000 pre-tax care to cover expenditures such as childcare.

As a result, it decreases the taxable income and increases take-home salary. Active Guard Reserve and active-duty service members can avail of the benefits offered by DCFSA for eligible individuals, such as disabled dependents or children under 13 years.

It can offer multiple advantages, as listed below:

• Helps to claim various tax benefits like child tax credits and income tax credits to reduce tax liability.
• It excludes a certain portion of the income proportional to the dependent from being taxed.
• For every child under 17, one can claim tax credit.
• Low- and moderate-income individuals can get refundable tax credits as claiming dependents makes them eligible for the Earned Income Tax Credit (EITC).
• For every dependent care, one can claim tax relief for their expenses as it helps one to qualify for dependent care credit.
• Acts as a powerful tax-saving strategy to get thousands of dollars as savings on taxes.
• It helps to increase the level of standard deduction of income tax, decreasing the taxable income to a lower ebb and reducing the tax bill more.

Let us use the table below to understand the difference between the two: