Rules for Dependency Exemptions
John D. Zook and Bruce A. Leauby
MARCH 2006 - The
Working Families Tax Relief Act of 2004 (WFTRA) affected many
areas of the Internal Revenue Code (IRC). Its primary purpose
was to reduce the federal tax burden of married taxpayers
with children. One of the new definitions from the WFTRA is
the uniform definition of a qualifying child. This establishes
a consistent definition for not only the dependency exemption
for a child, but also for the dependent care credit, the earned
income credit, the child tax credit, and head-of-household
the new law, dependents have been reclassified into two
groups: qualifying child and qualifying relative. For 2005,
the dependency exemption is $3,200 per qualifying child
or qualifying relative, indexed annually for inflation.
(This exemption is partially or completely phased out for
to the WFTRA, dependency exemptions were allowed for any
individual who met five tests. Those tests remain in effect
for qualifying relatives (or a member of the taxpayer’s
household) as defined under IRC section 152(d). Those five
tests are essentially the same, with the exception of the
income test for dependent children (modified by the qualifying
child definition). The five tests for qualifying relatives,
under IRC section 152, are:
The taxpayer must provide greater than half of the individual’s
individual is a relative or a member of the taxpayer’s
individual earns less than the current year’s exemption
amount. Under prior law, this was a major exception for
children of the taxpayer. It is no longer applicable for
the qualifying child test.
shall not be treated as dependents if required to file
a joint federal tax return with their spouses.
individual is either a citizen or resident of the United
States, or a resident of a country contiguous to the United
States (exceptions exist for certain legal adoptions).
five tests must be met in order for the taxpayer to claim
the dependency exemption for that individual.
definition of a qualifying child is provided under IRC section
152(c) and establishes a five-pronged test, which includes
Relationship: The individual must be a child of the taxpayer
or a descendant of such a child, or a brother, sister,
stepbrother, or stepsister of the taxpayer or a descendant
of any such relative.
legally adopted by the taxpayer have the same status as
a natural-born child. In addition, foster children placed
by an authorized placement agency or by judgment, decree,
or court order are also treated as natural-born children.
Age: The individual must, at the close of the taxable
year, be under 19 (under 24, if a full-time student).
Individuals are also treated as meeting the age requirement
if they are permanently and totally disabled [IRC section
22(e)(3)] at any time during the year, regardless of their
The individual must have the same principal place of abode
as the taxpayer for more than half of the year. The prior
law exemption regarding situations as absences due to
illness, education, business, vacation, or military service
remains the same.
Support: The individual cannot provide more than half
of their own support in the taxpayer’s calendar
year. (The joint return test also applies in this case.)
A qualifying child who provides over one-half of her own
support, however, may constitute a qualifying child of
another taxpayer for purposes of the earned income tax
The individual is either a citizen or resident of the
United States, or a resident of a country contiguous to
the United States.
that the gross income test no longer applies to a qualifying
a child is determined to be a qualifying child for multiple
taxpayers and they do not file jointly, then the individuals
can mutually decide who will claim the child on their tax
return (e.g., a child lives with his mother and grandmother
in the same residence). In the event that more than one
taxpayer claims a qualifying child as a dependent, the tiebreaker
rules determine who can legally claim the dependency exemption.
See the Exhibit
for the tiebreaker rules.
an individual fails the qualifying child test, the child
may be claimed as an exemption under the qualifying relative
test. Consider a 25-year-old son who is unemployed and lives
at home. He would not meet the qualifying child test, due
to his age. If all five dependency tests are met, however,
the son can be claimed as a qualifying relative.
someone who has no family relationship to the taxpayer,
but is a member of the household for the entire year, could
be a qualifying relative.
WFTRA modifies the definition of “head of household”
(HOH) to require that a taxpayer be unmarried (and not a
surviving spouse) and pay more than one-half of the cost
of maintaining a household which is the principal place
of abode for more than one-half the year for a qualifying
child or an individual for whom the taxpayer may claim a
new law has changed the qualifying individual language and
no longer references “son, stepson, daughter, or stepdaughter
of the taxpayer, or descendent of a son or daughter of the
taxpayer” in IRC section 2(b)(1)(A)(i), and instead
uses the new term “qualifying child.”
prior law, a taxpayer could claim HOH status if an unmarried
child lived with him, even if the taxpayer could not claim
the child as a dependent. The new law requires that a child
living with the taxpayer must be a qualifying child or must
qualify as a dependent (qualifying relative) in order for
the taxpayer to claim the HOH status.
a qualifying child is married at the end of the year, both
of the following must apply to file as HOH: A joint return
cannot be filed unless it is filed only as a claim for a
refund and no tax liability would exist for either spouse
if they filed separate returns. A child must also meet the
citizenship or residency requirements (with the exception
of certain adopted children).
children of divorced or legally separated parents, the present
law allows the custodial parent to release the claim to
a dependency exemption and the child care credit to the
non-HOH filing; however, the custodial waiver rule is disregarded
and the definition for a qualifying child must be met.
prior rule of claiming HOH status with respect to a parent
for whom the taxpayer may claim a dependency exemption and
who does not live with the taxpayer is still valid under
IRC section 2(b)(1)(B).
WFTRA has clarified the complexity of the current statutory
language of defining a child and has reclassified individuals
claimed as a dependent as either a qualifying child or a
qualifying relative. The rules for a qualifying child eliminate
the gross income test and relax the existing support test.
Rules for qualifying relatives have retained the prior requirements
for dependency classification.
consistent application of the definition of a qualifying
child should help reduce confusion and allow for greater
compliance with the tax code, especially in the earned income
credit reporting area. The tiebreaking rules should make
it easier for accountants faced with such situations.
D. Zook, CPA, is an associate professor of accounting
at La Salle University, Philadelphia, Pa., and is the managing
director and founder of Zook, Dinon & Roman, P.A., Moorestown,
N.J. Bruce A. Leauby, PhD, CPA, CMA, CFE,
is an associate professor of accounting at La Salle University,