You pay the bills, but can you claim a dependency deduction?

It used to be easy to determine the number of dependents you could claim on your tax return. Your children were your dependents until they moved out, and then they weren’t. These days, it’s not unusual for older children to live with, or be supported by, their parents. Because of this, determining your child’s dependency status for tax purposes has become more complicated.

Here are some of the rules you must know.

50% support. Your child does not have to live with you to be your dependent, as long as you provide more than half of his or her support. Common support items include food and lodging, clothing, transportation, and medical, educational, and recreational expenses. If you buy a car for your child and it is registered in the child’s name, the cost is a support item.
Age and income. If at the end of the year your child is under age 19, or is a full-time student under age 24, the child’s income is not a factor in determining your right to a dependency exemption. As long as you meet the support test, you may still claim the child. (A full-time student is one who attends school full time for at least five months of the tax year.) However, if your child doesn’t meet the age or full-time student requirement, you can’t claim a dependency exemption if the child has more than a certain amount of income for the year ($3,100 in 2004 and $3,200 in 2005).
Married child. If you support a married child, you can’t claim a dependency exemption if the child files a joint return with a spouse, unless the only purpose for filing is to obtain a refund of withheld taxes.
Divorce. If you’re divorced or separated, special rules apply in determining dependency exemptions for children. The general rule is that the custodial parent is entitled to the dependency exemption for the child unless that parent waives the right to the exemption in writing.

The parent who maintains a home for a dependent child for more than half of the year may still qualify for the earned income credit, the child care credit, and the head of household rate even if that parent has waived the dependency exemption to the noncustodial parent.

The parent who pays the child’s medical expenses may claim them along with his or her own, regardless of which parent gets the dependency exemption.

For more information about the rules as they apply to your particular situation, please call us.