Becoming a parent can be an incredibly rewarding adventure. But, as you might expect, the joys of parenting also come with quite a few challenges. In addition to budgeting for a new child, many new parents often wonder if—and how—they will be able to claim their child as a dependent.
Your status as a parent will have many financial implications, some of them will be frustrating or stressful, while others—such as the credits and deductions available—will be beneficial. Working with a tax expert will make it much easier to navigate these uncharted waters. If there is a child that depends on you for financial support, they will likely qualify as a dependent. However, there are some variables that can complicate this situation, such as age, your legal relationship to the child, and whether the child is responsible for covering any of their expenses. Before claiming the Child Tax Credit, be sure to check that they qualify.
Understanding the Child Tax Credit
In the United States, the most recent update to the Child Tax Credit (CTC) occurred in 2017. Following the passage of the Tax Cuts and Jobs Act (TCJA), parents could claim a $2,000 tax credit for each “qualifying” child. The tax credit is available to individuals earning up to $200,000 per year and joint filers earning up to $400,000 per year. Because the CTC is a tax credit, rather than a tax deduction, the CTC is applied to the total tax owed. If it is your first time taking advantage of the CTC, you may want to consider getting some outside help. Hiring a specialist to help you prepare your taxes is particularly recommended for anyone who has recently experienced a “status change”, such as marriage, divorce, a new job, and—of course—having children.
Who Qualifies for the Child Tax Credit?
When applying for the child tax credit, the first thing the IRS will consider is your relationship to the claimed dependent. According to the IRS, “To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepsister or a descendent of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child.”
Furthermore, the dependent will also need to be a US citizen, US national, or US resident alien. They will need to live with you for more than half of the taxable year, you will need to provide the majority of their financial support, and the child will need to be younger than 17 at the end of the taxable year (the most recent December 31st). While there are a few exceptions to these rules (see IRS Publication 972), these six tests (age, relationship, support, dependency, residence, and citizenship) will usually all need to be passed in order for someone to be considered a legal dependent.
Claiming Dependents in the Age of COVID-19
In response to the COVID-19 outbreak, Congress passed the “CARES Act”, which has been one of the most notable pieces of legislation of 2020. The comprehensive Act provides $1,200 to many individuals, along with $500 per each qualifying child. To claim this stimulus, an individual must have an adjusted gross income less than $75,000 for an individual, less than $112,500 for a head of household, and less than $150,000 for couples filing together. Following these limits, the benefit is phased down from $500 per child.
Due to the prolonged effects of the virus outbreak, there may be an additional stimulus package issued by the end of the year. While it is not clear whether this package will include direct stimulus (such as the CARES Act did), it is almost certain that the same dependent qualifications will be applied. However, as any experienced bookkeeper will tell you, all future unknowns come with some degree of risk. To help you prepare for future uncertainty, our tax and accounting services can help you develop a secure financial position, regardless of what the future has in store.
If you have not yet claimed or received the first round of stimulus, the IRS is still accepting new claims. For questions about claiming a child as a dependent or questions about financially adjusting to parenthood, in general, you can contact us here.