Your son is away at college, and you’re supporting him.
Your daughter lost her job and moved home with her baby and unemployed husband. You’re supporting them, too.
Can you still deduct your adult children on your taxes ?
The answer, in most cases, is yes. It’s definitely worth your time to look into it.
Adult Children and Their Effect on Your Deductions
More than one-third of millennials (age 18 to 31) are living at home, according to a 2012 study by the Pew Research Center. That translates to 21.6 million adults still sleeping, eating and watching TV under mom and dad’s roof.
In most cases, the parents are footing the lion’s share of the bill for things like rent or mortgage, electricity, food, water, and incidentals. So catching a break from the Internal Revenue Service is good news. Parents can deduct $3,900 from their taxable income for every dependent child and, based on what bracket you’re in, that can mean a nice chunk of change off your bottom line.
After all, by taking a big deduction you’re reducing your taxable income — meaning you could possibly slip into a lower tax bracket altogether.
Of course, it wouldn’t be the IRS if there weren’t thousands of conditions that had to be met to claim the deduction, and this is where the trouble usually starts.
The complex living arrangements in today’s society, particularly the issue of adult children moving back home. do not make it easy to determine whether junior’s name belongs on his own 1040 or whether he still can be claimed on his parents’ tax return.
“Most parents think because they provide most of the support for their adult children, that they should get a dependent exemption, and clearly that is not the case,” said J. Alden Baker, a CPA with accounting firm Baker, Hyatt, Homrich and Zokvic. “There is a lot ‘If this, then that’ in tax law. There are strings attached to almost everything, so you have to be careful before claiming your adult child as a dependent .”
Qualifying Child Status
The most significant factor is making sure your children fall into one of the two eligible categories: qualifying child or qualifying relative. If they pass either of those tests, the parents can use them as a deduction.
There are five tests to determine the status of qualifying child:
- Relationship: The child must be your son, daughter, stepchild, foster child or a descendant of any of them. A grandchild, for example, qualifies. It’s also possible to claim your brother, sister, half-brother, half-sister, stepbrother, stepsister or a descendant of one of them, such as a niece or nephew.
- Age: The child must be under
19 or a full-time student and under 24.
- Residency: The child must live with you more than half the year. There are exceptions made for temporary absences like attending college or a boarding school.
- Support: Parents must provide more than half the support for the year. This includes rent, utilities, food, house or car repairs, transportation, medical and clothing. If your child receives scholarships or aid from the state or federal government, that money does not count toward this formula.
- Joint return: Your child can’t file a joint return with a spouse, unless it’s only to claim a refund of income tax withheld or estimated tax paid.
If your child is married, you can still claim them as a dependent, as long as they don’t file a joint return and they meet the other four conditions.
There are all sorts of exceptions involved for divorced or separated parents, but the bottom line is that only one parent can claim the child for tax purposes.
Qualifying Relative Status
The rules differ slightly for children who fall in the category of qualifying relative, but the key fact to remember is the age rule is waived and gross income can be a deal killer. A qualifying relative can be any age, but they can’t have a gross income of more than $3,900 in one year.
There are four tests to determine status of qualifying relative :
- Already a qualifying child: If your child already meets the conditions for qualifying child listed above, they can’t also serve as a deduction in the qualifying relative category.
- Member of household or relationship: The person must live with you the entire year as a member of your household. If they don’t, they have to be related to you under the IRS categories listed in the section about relatives who do not have to live with you.
- Gross income: The person you want to claim must have a gross income of less than $3,900 for the year.
- Support: You must provide more than half the person’s support for the year for common expenses including rent, food, medical, transportation and recreation.
As Baker mentioned, there are a lot of provisions that go with each category, but if you get them through the qualifying test, you will catch a break from the IRS. That is an accomplishment worth noting.
Bill Fay is a writer for Debt.org, focused mainly on news stories about the spending habits of families and government. He spent 21 years in the newspaper business and eight more in television and radio, dealing with college and professional sports, then seven forgettable years writing speeches and marketing materials for a government agency.