Reduce Tax Burden – Claim your Dependants

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The concept behind tax planning is to set up your monetary affairs in the long run so that you can owe as little in taxes as possible. This can be done by following three fundamental approaches: you can reduce your taxable earnings, boom your deductions and take advantage of a tax credit.
Claiming a dependent makes a huge difference when it comes to taxes. Dependent has a major effect on your tax return, it helps you to gain the tax benefits like a child and dependent care credit, which in turn reduces your taxable income and increases the exemption amount you can claim.

What is a Dependent?

A dependent is generally a qualifying person who gives the lawful right to claim dependent-related tax benefits to the taxpayer. Commonly, a dependent is an own child, a relative, or a friend. In most cases, people choose their children as their dependents. But the most vital part is that not everyone qualifies as a dependent in the eyes of law. The Internal Revenue Code (IRS) conducts a few tests to check the person’s eligibility for a taxpayer’s dependent.
Dependents are
a) either a qualifying child, or
b) a qualifying relative

Conditions Need To Be Satisfied To Claim Dependents

Rules for Qualifying Children as Dependents

A Qualified Child who can be claimed as a Dependent can be your natural child, an adopted child, or an eligible foster child. There is no difference in the eyes of law between a natural child and an adopted child. Further, a Qualifying Child is eligible to be claimed as a Dependent if any all the below mentioned 4 tests are passed

The Relationship Test:

To meet this test, the child must be the taxpayer’s real son, daughter, legally adopted child, or a grandchild or the taxpayer’s relative such as brother, sister, stepbrother, stepsister, or any other relative.

 

The Residency Test:

To meet the requirements of this test, the qualifying child must be living with the taxpayer for more than half of the year. However, the home here doesn’t mean the traditional house, but it can be any place. The exception is if the child is living with someone temporarily due to education, illness, or business.

 

The Age Test:

To meet this test,
● The child must attain the age of 19

● To pass as a student, he/she should be a full-time student
● The child must be under the age of 24 by the end of the year

 

The Support Test:

To meet this test, the qualifying child must not have provided more than 50% of the support. A person’s funds do not hold unless they are spent on the taxpayer’s support.

 

 

Rules for Qualifying Relatives as Dependents

Dependents who do not satisfy the tests for a qualifying dependent child have to give a few other tests to meet the condition to be a qualifying relative. Four additional tests must be met for a person to be a qualifying relative. The tests for qualifying tests don’t have the condition of the age as in qualifying child tests. The tests are:
• Not a qualifying child test
• Member of household test
• Gross income test, and
• Support test

 

 

Not a Qualifying Child Test:

A child may meet this test if that child is the qualifying child of another taxpayer. It is allowed only when the child’s parent is not required to file an income tax return and either:
• Does not file a return, or
• Only files to get a refund of income tax withheld or estimated tax paid

 

 

Member of household Test:

Member of Household test implies that the person must either live as a member of the taxpayer’s house all year or be related to the taxpayer in one of the following ways:
– Child, stepchild, foster child, or a descendant of any of them
– Brother, sister, half-brother, half-sister, stepbrother, or stepsister
– Father, mother, grandparent, or another direct ancestor, but not foster parent, Stepfather, or stepmother
– Son or daughter of the taxpayer’s brother or sister (nephew or niece)
– Son or daughter of the taxpayer’s half-brother or half-sister
– Brother or sister of the taxpayer’s father or mother (uncle or aunt)
– Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

 

Gross Income Test:

To become eligible for this test, the dependent’s gross income for the tax year must be less than the threshold amount. Gross income is counted in all terms of money, property, and services that are not exempt from tax. Moreover, this test is not applied for dependent for qualifying children, only qualifying relatives.

 

Support Test:

To adhere to the objectives of this test, the taxpayer must not have provided less than 50% of the person’s total support for the tax year. This support is different from what we learned about in qualifying child cases. Here, taxpayers should analyze their contributions with the total amount of support the person received from all sources such as taxable income, tax-exempt income, and loans.

How To Claim The Dependent On Annual Tax Return?

While you put together your federal tax return, you possibly wish to look for every feasible deduction to decrease the amount of tax you owe. One manner to get this done is with the aid of claiming your children and different qualifying relatives as dependents. Every dependent claimed reduces your taxable earnings through one exemption.
Each dependent must meet all tests taken to be eligible for claiming dependants such as age, relationship, residency, and support tests. Moreover, a person can be claimed as dependent on one profit tax return per year. So in case, you proportion custody with a former partner, only certainly one of you can claim the child.


Step 1: Form 1040/1040A

Use either Form 1040 or Form 1040A to file your income taxes.


Step 2: Provide dependent information

You need to enter a few details about the dependent
● Full names of your dependents,
● Their Social Security numbers, and
● Their relationship with you.
Claiming a dependent usually demands that they live with you for more than six months, they provide less than half of their financial support and are above the age of 19, or under 24 if a full-time student. If you have more than one dependent, you need to add their information in the appropriate boxes provided.


Step 3: Add the number of dependents claimed

You can claim one exemption for each dependent,
● One for yourself, and
● One for your spouse.
An exemption is a fixed value that is subjected to vary in every tax year and decreases your chargeable benefits in the same way deductions do. You can raise this amount as per the exemptions you are allowed to have and then enter the total amount on another page.


Step 4: Child tax credit

Assess whether you can claim the child tax credit. After accessing all dependent information, the form then indicates a box for each dependent that suits you to claim a child tax credit. Generally, you can claim the credit for any dependent children that are under the age of 17 during the tax year. If you qualify, the credit allows a dollar-for-dollar decrease of your final tax debt for the year.


Benefits of claiming the dependents on Annual Tax Return

The intact idea behind claiming the dependent is that it makes it possible to pay lower taxes. Claiming a dependent allows you to have special adjustments, which usually involve the reductions, credits, and exemptions you can earn.
Most benefits from declaring a dependent are due to credits you can claim. The following credits may apply when you claim a dependent:


Child tax credit (CTC)

Under this, the taxpayer gets credit for up to $2,000 per qualifying child. Whereas the CTC gets lowered if you file as an individual without any dependent and earn an adjusted gross income of $200,000 or more, or if you’re wedded, filing combined, and earn a consolidated $400,000 or more.


Additional child tax credit (ACTC)

If part of the CTC decreases your tax liability to $0, which can be refunded $1,400 per qualifying child.


Earned income tax credit (EITC)

The Earned Income Tax Credit, EITC or EIC, is a profit for working people ranging from low to moderate-income. EITC decreases the amount of tax you owe and may give you a return.


Other dependent credit (ODC)

The Other Dependent Tax Credit (ODC), also pointed to as the Family Tax Credit and the No-Child Tax Credit gives a non-refundable credit of $500 for every individual qualifying dependent.


Do dependents have to file their Tax Returns too?

Even if you’re a child, filing a tax return might be essential depending on your income and conditions. In short, you’ll want to file your dependent tax return if:
● You meet all the filing requirements.
● You owe a refund.
If you’re claimed as a dependent, you must file the tax return if your income is more than the official deduction authorized for dependents:
● Your earned income is more than $12,200, which is the standard deduction for a single filer.
● Your unearned income (For instance, investment) is more than $1,050.


The Bottom Line
Guard yourself by obtaining certain obligations. You’re qualified to claim each dependent on your tax return before you do so. Get ready with all documents that will confirm your claim, and examine the laws for each tax