New Rules for Qualifying
The Working Families Tax Relief Act of 2004 includes new rules
for determining who can claim tax benefits for qualifying
children, including the dependent exemption and the child credit.
Families Tax Relief Act of 2004 is mostly about preventing
various tax benefits from expiring (click
here for details), but it includes significant new rules
defining who can claim tax benefits for qualifying children. The
idea is to make the rules simpler and more rational for five
common tax benefits:
- personal exemptions for dependent children
- the child credit
- the earned income credit
- the dependent care credit
- head of household filing status
We aren't going to provide full details here because that
would require quite a few pages of explanation. Instead, we'll
cover the highlights, with special attention to situations where
there may be a change as to which taxpayer can claim a child as
Residency Trumps Support
If we had to summarize the major change in three words, we
would say that under the new law, residency trumps support.
Under the old law, which remains in effect through 2004, you get
to claim a child as your dependent if you provide more than half
the child's support (and meet other requirements). Under the new
law, which takes effect in 2005, you get to claim the child as
your dependent if the child's principal place of abode is the
same as yours for more than half the year, even if someone else
provides more than half the child's support.
Example: A child lives with an unemployed parent,
and a grandparent provides most of the child's support.
Under the old law, the grandparent would claim the
dependency deduction. Under the new law, if the child
otherwise meets the definition of a qualifying child, the
dependency deduction would go to the parent with whom the
Support is still relevant in one important way: if the child
provides more than half his or her own support, the child is not
a qualifying child.
Divorce or Separation
Both the old law and the new law will recognize waivers that
permit one parent to claim a child as a dependent. If you are
currently in a situation where the right to claim the child as a
dependent is based on a waiver from the child's other parent,
the right to claim the exemption will not change.
There are times when more than one taxpayer could be entitled
to treat a child as a qualifying child. For example, the child
might live with both parents for seven months, and then live
with only one of them following a separation. For another
example, a child might live with a parent and a grandparent.
Under the old law, the exemption (and child credit, if
available) would go to the person who provided more than half
the child's support. Under the new law, the exemption may be
claimed by any taxpayer who qualifies, provided that no one else
claims the exemption. If more than one taxpayer claims the
exemption, it will go to one who "wins" according to
- Between a parent and someone who is not a parent, the
- Between two parents, the one with whom the child resides
the longest "wins."
- If the child resides the same amount of time with both
parents, the one with higher adjusted gross income "wins."
- Between two individuals who are not parents, the one
with the higher adjusted gross income "wins."
These rules can produce unfairness, particularly if the
person with a smaller amount of income (lower adjusted gross
income) is more generous in providing support to the child.
Overall the rules should make it easier to determine who is
entitled to claim the child as a dependent in most cases, and
will usually provide a fair result.
Other rules mostly remain the same. For example, the rules
for claiming someone other than a qualifying child as a
dependent are not changed. Furthermore, there is no change in
the "magic ages." The child credit still requires the child to
be under 17, and the qualifying child definition in general
applies only if the child is under 19 (or in the case of a
full-time student, 24). Likewise, the dependent care credit
continues to apply up to age 13 for children who are not
As noted earlier, the old rules apply through 2004. That
means you'll use the old rules when you file your 2004 tax
return in 2005. The new rules apply to tax years 2005 and later.