As of the summer of 2012, each dependent you claim on your tax return counts for a reduction of $3,800 in gross taxable income for the past tax year. That means that for every dependent you claim, it is as if you earned $3,800 less, and your taxable income is therefore reduced by $3,800. If you're in the 25 percent tax bracket, that means you save $950 for each dependent you claim. However, there are rules a dependent must meet before you claim her.
Rules for Dependents
Dependents must either be "qualifying children" under Internal Revenue Service rules if they are 19 or younger or full-time students up to the age of 24. Or they must fall into the category of "qualifying relatives" if they are older than 24. The amount of support provided as well as whether the dependents live with the taxpayer are the main criteria for both categories. Blood relatives as well as foster relatives, step-relatives and even live-in partners can qualify as dependents if the support and residency requirements are met.
Qualifying children are any biological, adopted, foster or step-children, siblings or step-siblings or the descendants of any of these individuals for whom a taxpayer provides at least 50 percent support. Disabled relatives are considered qualifying children regardless of the age limit that usually applies. Qualifying children must live with the taxpayer for at least half of the tax year and cannot file a joint return except to claim a refund. For instance, your nephew is a qualifying child if he lives with you and you pay for his food, school expenses, clothing and other major expenses, even if he has an after-school job.
Any relative or even a friend who crashes at your house after he loses his job can be counted as a qualifying relative for tax purposes. However, he must live with you and you must provide more than 50 percent of his support. Blood, adopted or step-relatives who do not live with you only meet the criteria for qualifying relatives if you are actually providing full support. If you have a daughter who is studying full time for a Ph. D. miles away from you, and you pay her rent and tuition, she is a qualifying relative.
If you and your spouse file separate tax returns, only one of you can claim a deduction for each dependent, even if both of you support him. You also cannot claim a dependent if your living arrangements or relationship with him violate local laws. On the other hand, a full-time student who lives in a dorm and meets the criteria for a qualifying child can be taken as a deduction, as his absence from your home for education is allowed under IRS rules. If you have any doubt as to whether someone you support is a dependent, contact a certified public accountant or other tax adviser. You don't want to endure an IRS audit for taking a deduction you're not allowed.
John DeMerceau is an American expatriate entrepreneur, marketing analyst and Web developer. He now lives and works in southeast Asia, where he creates websites and branding/marketing reports for international clients. DeMerceau graduated from Columbia University with a Bachelor of Arts in history.