Claiming Dependents: Complications in the New Tax Law
Starting with tax year 2005, there are new rules for claiming dependents. This has caused a lot of confusion among tax professionals and taxpayers.
I spoke with Kathy Burlison, Director of Tax Implementation at H&R Block headquarters, about the new "uniform definition of a child," and some issues that will complicate preparing taxes for 2005.
William Perez:What's the deal with the new rules for claiming dependents? Is there anything we should be concerned about?
Kathy Burlison: It would be wise not to simply do what you did last year. For example, the old support test is gone.
WP:The support test meant that if a taxpayer paid more than half of a child's financial support, then that taxpayer could claim the dependent. Under the new rules, the dependent cannot provide over half of his or her own financial support. So, potentially, more than one taxpayer could qualify to claim the same child?
KB: Yes. The support test is a "gotcha." There are scenarios where more than one taxpayer could claim a child. In that case, we would look at which taxpayer would have the best tax advantage in claiming the child.
WP:Are there situations where taxpayers could lose a dependent under the new rules?
KB: There are three family situations where taxpayers could lose the benefits of claiming a dependent. Unmarried couples who are supporting a child who isn't their "qualifying child" under the new rules could lose out. If the dependent is someone else's qualifying child, then neither partner could claim the child under the "qualifying relative" rules.
WP:So, let's say John and Mary, an unmarried couple, are caring for Kathy, who is John's neice. Kathy would be the qualifying child of her mother or father, but would be a qualifying relative for John and Mary. Since Kathy meets the definition of a qualifying child for at least one taxpayer, she cannot be claimed as a qualifying relative for anyone else?
KB: Yes, that's right. We could summarize it this way: Once a qualifying child, always a qualifying child, and never a qualifying relative.
WP:What are some other family situations where taxpayers could lose out?
KB: Separated parents who attempt to split the tax benefits, such as one taxpayer claiming the dependent and the other taxpayer claiming the child tax credit and earned income credit. Under the new rules for dependents, all the child-related tax benefits are tied to claiming the dependent. So now one taxpayer has to claim all the benefits.
WP:No exceptions?
KB: Except in the case of a court-approved separation or divorce decree.
WP:What about divorced parents where one parent waives the right to claim the dependent?
KB: The custodial parent can still waive his or her right to claim the dependent and the child tax credit. The dependency exemption and the child tax credit cannot be split, they must go together. The head of household filing status, earned income credit, and child and dependent care tax credit always stays with the custodial parent. The childcare credit can only be claimed for qualifying children.
WP:Thank you for speaking with me today.
Kathy Burlison is Director of Tax Implementation for H&R Block, and she provides training materials for all of the H&R Block tax advisors around the nation. H&R Block operates over 10,000 retail locations offering tax preparation services. H&R Block also publishes the TaxCut tax preparation software.
I spoke with Kathy Burlison, Director of Tax Implementation at H&R Block headquarters, about the new "uniform definition of a child," and some issues that will complicate preparing taxes for 2005.
William Perez:What's the deal with the new rules for claiming dependents? Is there anything we should be concerned about?
Kathy Burlison: It would be wise not to simply do what you did last year. For example, the old support test is gone.
WP:The support test meant that if a taxpayer paid more than half of a child's financial support, then that taxpayer could claim the dependent. Under the new rules, the dependent cannot provide over half of his or her own financial support. So, potentially, more than one taxpayer could qualify to claim the same child?
KB: Yes. The support test is a "gotcha." There are scenarios where more than one taxpayer could claim a child. In that case, we would look at which taxpayer would have the best tax advantage in claiming the child.
WP:Are there situations where taxpayers could lose a dependent under the new rules?
KB: There are three family situations where taxpayers could lose the benefits of claiming a dependent. Unmarried couples who are supporting a child who isn't their "qualifying child" under the new rules could lose out. If the dependent is someone else's qualifying child, then neither partner could claim the child under the "qualifying relative" rules.
WP:So, let's say John and Mary, an unmarried couple, are caring for Kathy, who is John's neice. Kathy would be the qualifying child of her mother or father, but would be a qualifying relative for John and Mary. Since Kathy meets the definition of a qualifying child for at least one taxpayer, she cannot be claimed as a qualifying relative for anyone else?
KB: Yes, that's right. We could summarize it this way: Once a qualifying child, always a qualifying child, and never a qualifying relative.
WP:What are some other family situations where taxpayers could lose out?
KB: Separated parents who attempt to split the tax benefits, such as one taxpayer claiming the dependent and the other taxpayer claiming the child tax credit and earned income credit. Under the new rules for dependents, all the child-related tax benefits are tied to claiming the dependent. So now one taxpayer has to claim all the benefits.
WP:No exceptions?
KB: Except in the case of a court-approved separation or divorce decree.
WP:What about divorced parents where one parent waives the right to claim the dependent?
KB: The custodial parent can still waive his or her right to claim the dependent and the child tax credit. The dependency exemption and the child tax credit cannot be split, they must go together. The head of household filing status, earned income credit, and child and dependent care tax credit always stays with the custodial parent. The childcare credit can only be claimed for qualifying children.
WP:Thank you for speaking with me today.
Kathy Burlison is Director of Tax Implementation for H&R Block, and she provides training materials for all of the H&R Block tax advisors around the nation. H&R Block operates over 10,000 retail locations offering tax preparation services. H&R Block also publishes the TaxCut tax preparation software.
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