Being able to claim a personal exemption for children has been a great way for taxpayers to save some money on their taxes, but the Tax Cuts and Jobs Act, which took effect for the 2018 tax year, has eliminated that exemption through 2025. Claiming a child on your taxes may still be possible through the earned income credit or the child tax credit. Even though more young adults than ever are living with their parents due to student loans and the high cost of housing in many areas, claiming these credits is only allowed when the child satisfies all the IRS requirements for dependency, including the age requirement.
Tax reform has eliminated the personal exemption for children. There are still a few tax credits that you may be able to claim if your child qualifies.
Loss of Personal Exemption for Children
Prior to the Tax Cuts and Jobs Act, qualifying children and certain other dependents could be claimed for a personal exemption that reduced taxable income. In 2017, married taxpayers who were filing jointly could claim a $4,050 personal exemption for themselves and for each of their dependent children. For 2018 through 2025, the personal exemption deduction will not be available. To compensate, the standard deduction has been raised significantly from $9,350 to $18,000 for heads of household and from $12,700 to $24,000 for married filing jointly.
Tax Credit vs. Deduction
There is an advantage to tax credits over deductions since a credit reduce your tax liability on a dollar-for-dollar basis. A $200 credit means you take that amount off the final amount you owe the IRS. A deduction reduces the amount of your income that’s subject to tax based on your tax rate. For example, if your tax rate is 15 percent, a $200 deduction means your taxable income will be reduced by 200 x .15, or $30. The tax credit brings a bigger tax savings.
There are two main types of tax credits: refundable and nonrefundable. With a refundable credit, some or all of the credit will be refunded to the taxpayer after the tax liability is met. With a nonrefundable credit, the credit is limited to payment of tax liability and nothing is refunded.
Earned Income Credit
As its name implies, the earned income tax credit is based on the amount of money you earn. This refundable credit is intended to benefit low- to medium-wage earners, especially those with children. The maximum earned income credits for 2018 are $6,431 with three or more qualifying children, $5,716 with two children or $3,461 with one child. To qualify for this credit in 2018, a married couple filing jointly must earn less than $46,010 per year with one child, less than $51,492 with two children or less than $54,884 with three or more children. In addition, each child must pass all the requirements in what is known as the qualifying child test.
Child Tax Credit
Another child benefit that wasn’t eliminated by the Tax Cuts and Jobs Act is the child tax credit. Under the revised rules for this credit, which are in effect through 2025, taxpayers with qualifying children are eligible for up to $2,000 per child, an increase from the child tax credit 2017 amount of $1,000. The child tax credit is a refundable credit. Under tax reform, up to $1,400 of the credit can be refunded.
A new benefit provided by tax reform is a $500 credit for dependent children who do not qualify for the child tax credit. Certain nonchild dependents may also be eligible for this credit. This nonrefundable credit can be claimed for a child or other dependent using either the Social Security number, individual tax identification number or an adoption tax identification number. This benefit will be in effect through 2025.
The Qualifying Child Test
In order to qualify for the earned income credit or child tax credit, a child must pass tests pertaining to relationship, age, length of residency and whether the child files his own joint return. The requirements are similar to the requirements prior to tax reform for taking a personal exemption for a child.
Qualifying Child Relationship Test
The IRS uses a broad definition for your relationship to your qualifying child. Basically, anyone who is your biological or legal descendant or your stepchild, adopted child or foster child may qualify. Biological and legal descendants who may qualify include sons and daughters as well as brothers, sisters, half brothers and sisters, stepbrothers and stepsisters. Descendants such as grandchildren, nieces and nephews also qualify for the relationship test.
Qualifying Child Age Test
For the age test, the IRS looks at a child’s age at the end of the year for which taxes are being filed. You must be older than someone you claim as your child, or your spouse must be older if you are married filing jointly. If not a full-time student, the child must be younger than 19. Full-time students qualify as dependents up to age 24. The IRS defines a full-time student as someone who is enrolled in a full-time course of study for five calendar months during the year. If permanently and totally disabled, a child may be any age and still claimed as your dependent as long as all other qualifications are met.
Qualifying Child Length of Residency Test
The residency portion of the qualifying child test states that the child must have lived with you in the U.S. for more than six months during the tax year. If you are married filing jointly, your child can live with your spouse to qualify. As far as where you and your child lived, the IRS allows homeless shelters and other nontraditional residences. There are some special exceptions for a child’s temporary absence from your home, such as illness, military service, school attendance, business and juvenile detention.
Qualifying Child Joint Return Test
This final test requires a qualifying child to not file a joint return for the same year that you claim them as a dependent. For example, if you supported your 18-year-old son while his wife was serving in the military, but he then filed a joint return with his wife for her full-time income, you can’t claim him as your dependent even though he qualified in other ways.
There is an exception to the joint return test for couples who file jointly only to claim a tax refund. This could occur if you supported your 18-year-old married daughter and she and her husband had a small income. If they had no tax liability and only filed taxes for a full refund of money withheld from their pay, then your daughter could be claimed as your dependent.
Same Qualifying Child?
It’s possible that a child meets the qualifying child requirements for more than one taxpayer. For example, parents who are filing separately but living together with the child may both want to claim the child. The earned income credit and child tax credit allow only one person to claim a child as qualifying per tax year. The IRS supplies a series of tie-breaker rules, such as the parent with the highest adjusted gross income getting priority if a child lived with both parents for the same amount of time.
Claiming Your Tax Credits
In order to claim the earned income credit or child tax credit, you will need to file a Form 1040 tax return along with the associated schedules and forms for the credit you want. You can also refile taxes for the previous three years to claim past credits you may have missed.