TAX TIP No. 6
Your son is off at college. Can you still claim him as a dependent? The answer for most parents is "yes." But, as is often the case with tax questions, determining who can be claimed as a dependent is not always a clear-cut exercise.
Dependent claims aren't limited to parents. An adult relative could qualify as a taxpayer's dependent as long as he or she meets certain Internal Revenue Service conditions.Making sure the requirements are met is critical, because dependents can help reduce your tax bill. In many cases, you can claim certain tax-cutting deductions and credits related to a dependent.
Even if these added tax breaks don't apply to your situation, a dependent named on your return can still trim your taxes. Each dependent directly translates into an exemption, a specific dollar amount deducted from your adjusted gross income.
The exemption amount is adjusted annually for inflation and can be found on your tax return form. On 2008 returns, each exemption allows a filer to cut taxable income by $3,500. By lowering your taxable income, your tax bill usually is a little less.
Tax definition of a child
Most often, dependent claims revolve around children. Just when, for tax purposes, is a child a qualifying child? The answer to that used to vary considerably, depending upon which tax benefit you wanted to claim.The key tax breaks associated with a child are the dependency exemption, head of household filing status, the child tax credit, the child and dependent care credit, and the earned income tax credit. Previously, each of these tax situations had different requirements for how a child could help you qualify for the separate tax breaks.
In an attempt to streamline the many rules connected to the assorted child-related tax benefits, the IRS created a uniform definition of a qualifying child. Although there are still some variations (usually concerning the age of the child), just who the IRS considers a child for tax purposes is now more consistent.
"What was considered a child for each of those benefits was a little confusing for some taxpayers," says Kathy Burlison, director of tax implementation for H&R Block in Kansas City, Mo. "For some, the changes will have some good consequences."
And, as is often the case with taxes, some will find the changes will present new problems.
Tax changes reflect changing families
The most significant change is in the area of adult support. This used to be a key determinant of who got to claim a child on a return. And it's one that posed many problems, especially when a child lived with multiple adults, several of whom provided money for the household."The traditional family won't see any change," says Burlison. "A single-parent family won't either. But multigenerational families will see changes, so you've got choices as to who gets to claim the child for tax purposes."
Donna LeValley-Cocovinis, tax attorney and contributing editor to J.K. Lasser's "Your Income Tax 2008," agrees.
"The tax law is catching up to changes in the world," she says. "We now have single parents who've never married living with an adult parent or grandparent."