To claim a niece or nephew as an exemption on your taxes, you must meet all the criteria for either a qualifying child or a qualifying relative. You're off to a good start because your niece or nephew meets the relationship requirement to be your qualifying child. However, even if a niece or nephew meets all the other requirements to be your qualifying child, you can't claim her if she qualifies as someone else's qualifying child.
In order to claim a niece or nephew as a qualifying child, the child must be under 19 years old at the end of the year. Exceptions allow you to claim a full-time student until the year he turns 24 years old or a permanently disabled child no matter his age. The tests for being a qualifying relative do not impose an age limit.
Your niece or nephew must live with you for at least half the year. There are exceptions for short-term absences, such as education or hospitalization. For example, if your niece lives with you for most of the year, but spends two months at a boarding school, you can still claim her. Qualifying relatives must usually live with you for the entire year, but nieces and nephews count as relatives who don't have to live with you, so you automatically meet the residency requirement for qualifying relatives.
Even though the support tests sound like two sides of the same coin, there are important differences between the test for qualifying children and qualifying relatives. To be a qualifying child, your niece or nephew cannot provide more than half his own support. To be a qualifying relative, you must provide more than half the support for your niece or nephew. Support includes the costs of living, such as rent, utilities, food, vacations and education.
Gross Income Limits
You can't claim your niece or nephew as a qualifying relative if her gross income exceeds the amount of a dependent exemption. For example, in 2012 each dependent reduces your income by $3,800 so if your niece or nephew has more than that in gross income, she doesn't meet the tests for being a qualifying relative. Gross income includes all income not exempt from taxes. However, the IRS does not put any similar limits on the gross income for qualifying children.
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