Claiming Adult Children on Your Taxes

Watching our children grow up and leave the nest brings mixed emotions. Alas the prolonged economic downturn has forced thousands of young adults to move in with their parents until their job prospects improve.

On the cusp of tax season, a lot of parents are grappling with an issue: Can you claim an adult child as a dependent? For 2011, each dependent reduces your taxable income by $3,700. For a family in the 25% tax bracket, that works out to a tax savings of $925, which buys a lot of groceries.

Unfortunately, the fact the you provide a roof and food for an adult child does not automatically mean you can claim that individual as a dependent. There's a four point litmus test to determine if your child meets the IRS definition of "qualifying child".

1. Relationship. The individual must be your child, stepchild, foster child, sibling, stepsibling or a descendant of one of those (such as a grandchild).

2. Age. They must have been under age 19 at year's end, or under 24 if the child was a full-time student for at least five months of the year.

3. Residence. The child must have lived with you for more than half of the year. There are some exceptions for children of parents who are separated or divorced.

4. Support. You must have paid more than half of the child's support during the year. To calculate how much you spend on support, you can include your child's college costs, food, clothing and medical and dental expenses.  If your child is on your health insurance plan,  you can include a portion of your premium.  You can also include a percentage of your ongoing household expenses when calculating the amount you spend on support.  For example, if  five people live in your home and one is an adult child, you can include one-fifth of your utility bills.  As long as your child's income doesn't exceed the amount you spent on support, and meets the other criteria, you can claim the child as a dependent.

For example, if your son graduated from college in May, found a job in September and earned $20,000. As long as the amount you spent on his education exceeded $20,000, you can claim his as a dependent. However, if you claim your child as a dependent, he can NOT claim personal exemption on his own tax return.

Qualifying Relative
The increasing trend of adult children living with parents is not limited to recent college graduates.  Thousands of adult children who have been out of college for a year or more have been forced to move in with their parents because they can't find a job, or lost their job or homes or both.

If you're supporting an adult child who fails the age test, you may still be able to claim him or her as a "qualifying relative".  Be advised, though, that the standard for qualifying relative is much higher.

In addition to the "Support" and "Residence" criteria,  the qualifying relative must have earned less than the amount of the personal exemption.  This income test prevents a lot of parents from claiming older adult children as dependents because even a part-time job will render the child ineligible.

At the other end of the generational spectrum, hard times have also forced many families to take in older parents, or provide them with financial support. Claiming a parent as a dependent may be easier than claiming an older child for two reasons:

1. Social Security isn't included in the gross income test.  If Social Security is your parent's sole source of income, the income test isn't a problem for you. However, you can't claim a parent who earns $3,700 or more from other sources, such as a pension, interest of dividends.parent

2. Your parent doesn't have to live with you. Suppose your parent lives in an apartment or assisted-living facility, but you pay most of the bills. You can claim that parent as a dependent, as long as the other tests are met.


If you are in a similar situation but are unsure and need to ask questions, contact me for a consultation.
Keep Life Simple.
Liz