The Effect of Dependents on Taxes
Claiming a dependent on your tax return generally requires that you financially support that individual, regardless of whether it's your child, parent or relative. The IRS rewards you for taking on this financial burden by allowing you to claim exemptions and tax credits and in some cases, can even put you in a lower tax bracket. Before you claim any of these tax benefits, you must satisfy all eligibility criteria for each dependent.
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Qualifying Children and Relatives
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The most common dependent claim is for children. In addition to biological children, qualifying children include stepchildren, foster children, siblings, step siblings and their descendants, like your grandchild or nephew. They must be under the age of 19 at all times during the tax year, or under the age of 24 when attending school full-time. Each child must live with you for more than half of the tax year and may not provide more than half of his own financial support. The IRS also allows you to claim adult relatives as your dependents. These individuals must reside with you for the entire tax year; however, if claiming an elderly parent, it's not necessary for the parent to live with you at all. And unless your relative suffers from a disability, he must earn less than $3,650 of gross income to be your dependent.
Tax-Saving Exemptions
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When you claim dependents on your tax return, the IRS allows you to take an exemption for each one. An exemption is similar to a deduction in that it reduces your taxable income. However, the amount of each exemption is fixed by the government each year and is not subject to additions or reductions based on personal circumstances. The amount increases slightly each year for inflation and as of publication, each exemption you claim reduces your taxable income by $3,700.
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Head of Household
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If you are an unmarried taxpayer, then claiming dependents may allow you to use the head of household filing status rather than single. In addition to being unmarried and having at least one dependent, you must also pay more than half the cost of maintaining a home during the year. If you qualify, then in addition to your dependent exemptions, you can also claim a larger standard deduction than single taxpayers. In addition, head of household filers are subject to different tax brackets that impose a lower rate of tax on a larger portion of your income.
Dependent Tax Credits
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The IRS offers a range of tax credits that are only available to taxpayers who claim dependents on their tax returns. A tax credit is more valuable than a deduction since it reduces the tax you owe on a dollar-for-dollar basis rather than just reducing your taxable income. For example, if you have a dependent who is under the age of 17, you can claim a child tax credit worth up to $1,000. Depending on your circumstances, you may also qualify for an additional tax credit that covers the expense of hiring someone to care for your dependents.
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