With graduation day just around the corner, parents across the country are struggling to find the perfect gift. Might I suggest a personal exemption? I know, that sounds kind of odd. But as jobless rates stay elevated, more college grads are living at home after graduation.
The rules for claiming a dependent are pretty simple. You can claim a qualifying child or a qualifying dependent.
Claiming a qualifying child
To claim a qualifying child, you have to meet five tests:
- To meet the relationship test, a child must be your son, daughter, stepchild, foster child or a descendant (for example, your grandchild) of any of them, or your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant (for example, your niece or nephew) of any of them.
- To meet the age test, a child must be under age 19 at the end of the year and younger than you (or your spouse, if filing jointly); a student under age 24 at the end of the year and younger than you (or your spouse, if filing jointly), or permanently and totally disabled at any time during the year, regardless of age.
- To meet the residency test, your child must have lived with you for more than half the year (some exceptions apply).
- To meet the support test, the child cannot have provided more than half of his or her own support for the year. That is not the same as saying that you have provided more than half of the child's support.
- To meet the joint return test, the child cannot file a joint return for the year. An exception applies if your child and his or her spouse file a joint return only to claim a refund of income tax withheld or estimated tax paid.
While most of those criteria might still apply to a college grad, the age requirements make it fairly unlikely that after graduation, you'd still be claiming your child as a qualifying child. Unlike a qualifying child, a qualifying relative can be any age: There is no age test for a qualifying relative.
Claiming a qualifying relative
Four tests must be met for a person to be your qualifying relative:
- To meet the not a qualifying child test, the relative cannot be your qualifying child or the qualifying child of any other taxpayer.
- To meet the member of household or relationship test, the relative must either live with you all year as a member of your household, or be your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild); your brother, sister, half brother, half sister, stepbrother, or stepsister; your father, mother, grandparent, or other direct ancestor, but not foster parent; your stepfather or stepmother; a son or daughter of your brother or sister; a son or daughter of your half brother or half sister; a brother or sister of your father or mother or your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
- To meet the gross income test, a person's gross income for the year must be less than $3,800. Gross income includes earned income (like wages) as well as unearned income (like dividends and interest). It also includes all taxable unemployment compensation and certain scholarship and fellowship grants. It does not include exempt income, such as certain Social Security benefits.
- To meet the support test, you generally must provide more than half of a person's total support (food, lodging, clothing, education, medical care and the like) during the calendar year. Note that this is very different than the support test for a qualifying child. To figure this test, compare the amount you contributed to the person's support with the entire amount of support that person received from all sources, including support the person provided from his or her own funds.
You can see from the list that it's possible for your child who is a college grad to be a dependent as a qualifying relative (but not a qualifying child). So should you?
That depends. Claiming a dependent for purposes of a personal exemption (and possibly other tax breaks) is a valuable tax break to you as a parent. Similarly, filing as independent may allow your child — depending on the circumstances — to have withholding refunded and possibly take advantage of other refundable credits (meaning that any tax credit over your liability may be refunded to you) as well as deductions that might otherwise be lost.
Run the numbers. And talk. There's a lot to consider beyond the numbers — chief among them, some sense of financial independence (even when that's not really the case). And that might be the most valuable gift you can offer.
More about family finances
Creating accounts for kids: Practical and tax consequences
Claiming dependents on your taxes
Tax consequences of gifts to kids