| Tax
Act Creates Uniform Definition of a Qualifying Child
By
Mark H. Levin
DECEMBER 2005 - Over
the years, many tax provisions added to the IRC have dealt
with children, such as the dependency exemption, the child
credit, the dependent care credit, and head of household
status. Most of these provisions differ in their definitions
of what constitutes a qualifying child. These differing
definitions have caused confusion for taxpayers, because
a child may be a qualifying child for some provisions but
not for others. The Working Families Tax Relief Act of 2004
(WFTRA) goes a long way in remedying this confusion by enacting
a uniform definition of a qualifying child.
For
tax years beginning after December 31, 2004, section 201
of the WFTRA establishes a uniform definition of a qualifying
child for the purposes of the dependency exemption, the
child credit, the earned income credit, the dependent care
credit, and the head of household status. In creating a
uniform definition of a qualifying child, the WFTRA sets
forth three tests: a residency test, a relationship test,
and an age test. In the event that more than one taxpayer
claims the child as a qualifying child, the new law establishes
a tiebreaker test. While there is now a basic uniform definition
of a qualifying child, the act does not change other requirements
to claim one or more of the four benefits—for example,
the earned income requirement of the earned income credit.
In addition, under WFTRA section 201, adding IRC section
152, taxpayers may still claim individuals as dependents
even if they do not meet the new criteria as long as they
meet the requirements under prior law.
Residency
Test
The
residency test requires that the child have the same residence
as the taxpayer for more than one-half of the taxable year.
The temporary absence due to special circumstance exceptions
of pre-WFTRA law, for absences due to illness, education,
business, vacation, or military service, will still not
be treated as absences for purposes of the residency test.
Relationship
Test
Under
WFTRA section 201, adding IRC section 152, the relationship
test requires that the child be the taxpayer’s son,
daughter, stepson, stepdaughter, or a descendant of any
such individual. An individual legally adopted by the taxpayer,
or an individual who is placed with the taxpayer by an authorized
placement agency for adoption by the taxpayer, is treated
as a child of the taxpayer by blood. A foster child who
is placed with the taxpayer by an authorized placement agency,
by judgment, decree, or by other order of any court of competent
jurisdiction, is treated as the taxpayer’s child.
Age
Test
The
age test varies depending upon the tax benefit. Generally,
a child must be under age 19 (or age 24, if a full-time
student) to be a qualifying child for purposes of the dependency
exemption. In addition, under IRC section 2(e)(3), there
is generally no age limit that applies to any individual
who is totally and permanently disabled at any time during
the calendar year. WFTRA section 201 retains the present-law
requirements that a child be under age 13 (if not disabled)
for purposes of the dependent care credit, and under age
17 (whether disabled or not) for purposes of the child tax
credit.
Tiebreaker
Test
If
more than one taxpayer is qualified to claim the qualifying
child benefits under the three tests above, a tiebreaker
test is used. First, if only one of the taxpayers that qualify
is a parent, the child is deemed to be the qualifying child
of the parent. Second, if both parents claim the child and
the parents do not file a joint return, then the child is
deemed a qualifying child of the parent with whom the child
resides for the longest period of time; if this test results
in a tie, it is broken in favor of the parent with the highest
adjusted gross income. Third, if the child’s parents
do not claim the qualifying child benefits, then the child
is deemed a qualifying child of the nonparent claimant with
the highest adjusted gross income.
The
WFTRA did not make any changes to the rules governing the
qualified child benefits claimed by natural nonparents and
others.
This
welcome “simplification” of the IRC will certainly
reduce the confusion in determining whether or not a parent
or other eligible custodian qualifies to claim the benefits
of the various child exemption and tax credit provisions.
Mark
H. Levin, CPA, is manager, state and local taxes,
at H.J. Behrman & Company, LLP, New York, N.Y. He is a
member of the NYSSCPA’s Tax Division Oversight Committee
and New York, Multistate and Local Taxation Committee.
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