Originally published in Practical Taxation, a Thomson Reuters Publication DEPENDENTS CONTINUE TO PROVIDE VALUABLE TAX BE

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Originally published in Practical
Taxation,
a Thomson Reuters Publication
DEPENDENTS CONTINUE TO PROVIDE VALUABLE TAX BENEFITS: AN
ANALYSIS
AVI O. LIVESON
Even though the
exemption for dependents is not
currently available, there are stiu benefits to
taxpayers who
can caima dependent. Many
taxpayers fail to claim dependents because the rules
discussed in this article are not
sufficiently understood.
Many taxpayers assume that only their minor qualifying
child tests, because, under Section children qualify as dependents
for tax purposes, 152(d)(1)(D), one of the requirements for and
that, in any case, since the exemption for de- qualifying relatives
is that the individual not be pendents is not currently available,
claiming a de- anyone's qualifying child. pendent no longer offers
any tax benefits. These Qualifying children. Section 152(c)
contains assumptions are incorrect, however, and can lead the tests
for qualifying children. First, under to the loss of substantial
tax savings.
Section 152(c)(2), the individual must be either This
article reviews the rules on how an in- a child, brother, sister,
step-brother, step-sister dividual may qualify as a dependent,
either as a of the taxpayer, or a descendant of such an indi
taxpayer's “qualifying child,” or “qualifying rel- vidual (i.e.,
grandchild, niece, nephew, grand ative.” It also discusses the
benefits that con- niece, etc.). Clearly, the net is cast much more
tinue to flow to taxpayers who can claim a de- widely than only
over the taxpayer's children. pendent, including a favorable filing
status, an The terms “brother” and “sister” include half increased
medical expense deduction, the child siblings as well. Under
Section 152(1)(1), tax credit, and others.
"child” is broadly defined to include step-chil dren,
legally adopted children (or individuals
lawfully placed with the taxpayer for legal adop The
statutory framework
tion by the taxpayer), and foster children placed An
individual may qualify as the dependent of a tax- with the taxpayer
by an authorized placement payer either as the taxpayer's
“qualifying child," or agency or by court order. "qualifying
relative.” Both terms are misnomers, Second, under Section
152(c)(3), the indi since, as noted below, qualifying child status
is not vidual must be under 19, or a full-time student limited to
the taxpayer's children, and qualifying rel- (defined below) under
24, as of the end of the ative status is not limited to the
taxpayer's relatives. year. The individual must also be younger
than
For any individual whose dependency sta- the taxpayer
who is claiming him or her as a de tus you are testing, you must
first check the pendent. Thus, for example, a taxpayer
can
only claim his sister as his qualifying child
if
AVI O. LIVESON, JD, LLM, is a Professor in the Economics
Depart
she is younger than him. An individual who is ment at
Hunter College of the City University of New
York.
permanently and totally disabled at any
time
PRACTICAL TAX STRATEGIES
SEPTEMBER 2021
Originally published in Practical Taxation, during the
year is treated as meeting the agerthomsdaughter Plicuruld be Ann's
qualifying child quirement. For these purposes, under Section as
her sister, and she is also Tom's qualifying 152(1)(2), a full-time
student is defined as an child as his daughter. individual who is
registered for some part of at Under Section 152(c)(4), if more
than one least five months at an educational organiza- taxpayer can
claim a qualifying child, the fol tion for the number of hours
considered full- lowing rules apply. If one taxpayer is the indi
time attendance by it, typically 12 hours. For vidual's parent and
the other taxpayer is not, example, a student taking 12 credits who
grad- the individual is treated as the qualifying child uates in
May, will qualify for that year, because of the parent.* Thus, in
the above examples, he maintained his status during at least part
of priority is given to Ann in the first example, the five months
January through May.
and to Tom in the second: the individual's par Third,
under Section 152(c)(1)(B), the indi- ent in each case. If both
taxpayers are the indi vidual must live with the taxpayer (“have
the vidual's parents and they are not filing jointly, same
principal place of abode”) for over half priority is given to the
parent with whom the the year. Temporary absences due to circum-
child resided for a longer period during the stances such as
illness, vacation, education, or year." If that period is the same
for both par military service are not counted as time awayents,
e.g., all three live together, priority is given
from home.?
to the parent with the higher adjusted gross in Under
proposed regulations that may be re- come (AGI). If neither
taxpayer is the parent, lied on until finalized, if an individual
is born priority is given to the taxpayer with the high or dies
during the year, this requirement will be est AGI. Last, if no
parent who can claim the treated as met if the taxpayer's home was
his individual as a qualifying child does so, any home for over
half of the period during which other qualifying taxpayer may claim
the indi he was alive.
vidual as his or her qualifying child as long as Fourth,
under Section 152(c)(1)(D), the in- that taxpayer's AGI is higher
than the AGI of dividual must not support himself. Signifi- each
parent. cantly, the individual does not have to be sup- Qualifying
relatives. If you determine that ported by the taxpayer, he merely
needs not to an individual does not qualify as a taxpayer's be
self-supporting. Of course, anyone who qualifying child, he is not
yet out of the game. does support himself should not qualify as a
He may qualify as the taxpayer's qualifying rel "dependent.” For a
discussion of what is meant ative under Section 152(d). by
“support," see below.
First, under Section 152(d)(2), the individ There is no
gross income test under the ual must be related to the taxpayer as
a child, or qualifying child rules. An individual may have
descendant of a child, sibling or stepsibling, a substantial amount
of gross income during parent, or ancestor of a parent, stepparent,
son the year. As long as it is not used to cause the or daughter of
a sibling (i.e., niece or nephew), individual to be
self-supporting, the qualifying or a sibling of a parent (i.e.,
uncle or aunt). child tests can be satisfied.
Note that cousins are not included in this list.
Tie-breaking rules. An individual may qual- Alternatively, the
individual may be any indi ify as a qualifying child for more than
one tax- vidual (other than the taxpayer's spouse), who payer. In
that case, tie-breaking rules deter- has the same principal place
of abode as the mine the “winner.” For example, say Tom's taxpayer
and who is a member of the taxpayer's daughter Ann and
granddaughter Jill (Ann's household. Under this last provision, an
indi daughter) both live in the same home with vidual who is not
related to the taxpayer may Tom. Jill is under 19, unmarried, and
does not qualify as the taxpayer's "qualified relative.” support
herself. Jill is Ann's qualifying child as Also, under this last
provision, a cousin of the her daughter, and she is also Tom's
qualifying taxpayer, who is not treated as a close-enough child as
his granddaughter. A similar situation relation for these purposes,
will nevertheless arises if Jill is Ann's younger sister and Tom's
qualify if he or she lives with the taxpayer.
1 Section 152(f)(4). 2 Reg.
1.152-1(b).
Prop. Reg. 1.152-4(d)(1). All of the proposed
regulations in this article may be relied on until finalized,
according to the Pream ble to the Proposed Regulations dated
1/18/2017.
4 Section 152(c)(4)(A)(1). $ Section
152(c)(4)(B)().
Section 152(c)(4)(B)(ii). Section 152(c)(4)(A)(ii).
Section 152(c)(4)(C).
DEPENDENTS
SEPTEMBER 2021
PRACTICAL TAX STRATEGIES
Originally published in Practical Taxgtion, Second,
under Section, Hörlis Repersthabileationby other individuals for
Mark's support. Alex dividual's gross income must be below an
infla- also provided Mark with lodging, the fair rental
tion-adjusted “exemption amount," which is value of which is $500 a
month ($6,000 for the $4,300 in 2021. This requirement often causes
year). The lodging brings the total support a taxpayer to fail to
qualify to claim an elderly spent on Mark up to $26,000, and brings
Alex's parent or grandparent as a dependent. Even if contribution
up to $14,000. Accordingly, Alex the taxpayer supports the
individual (see meets the over-50% support test. below), if he or
she is holding on to a modicum Services provided to the individual
are val of investments, enough to generate $4,300 or ued at the
cost of the services if they are paid for. more of gross income,
the gross income re- Services provided directly by the taxpayer are
quirement will deny dependent status. If those not included in the
total support."