Why the Tax Dependency Exemption Benefit is Important for Federal Employees

The Tax Cuts and Jobs Act of 2017 (TCJA) reduced the dependency exemption deduction to $0 for the years 2018-2025. This has resulted in the suspension of the deduction for personal exemptions on federal income tax returns during those eight years. Nevertheless, there are other provisions of the Internal Revenue Code (IRC) that utilize the dependency exemption rules, meaning for those tax provisions, the dependency exemption benefit for the tax year is utilized.

This column explains how the dependency exemption benefit is important for federal employees, many of whom are currently or who will soon be preparing their 2020 federal income tax returns in the coming weeks.

According to the IRC, the term “dependent” means either a (1) “qualifying child” or a (2) “qualifying relative”.

The primary difference between a qualifying child and a qualifying relative is the various tax attributes attributed to each. The following table summarizes:

An individual cannot claim any dependents as a personal exemption if the individual, or his or her spouse if filing married filing joint, can be claimed as a dependent by another individual. The person who is claimed by the individual as a dependent must be: (1) unmarried (or if married, does not file a joint tax return); (2) a U.S. citizen, resident alien, or national or a resident of Canada or Mexico; and (3) either a qualifying child or a qualifying relative.

Qualifying Child

A qualifying child is a person who meets the following six tests: (1) relationship; (2) age; (3) residency; (4) support; (5) joint return; and (6) tie-breaker test if the child is qualifying child of more than one person.

· Relationship test. The person must be the individual’s:
– Son, daughter, stepchild, eligible foster child, or grandchild
– Brother, sister, half-brother, half-sister, stepbrother, stepsister, niece or nephew.

· Age test. The person must be:
– Under age 19 at the end of the year and younger than the individual (or the individual’s spouse if married filing joint) or

– Under age 24 at the end of the year and a full-time student, and younger than the individual (or the individual’s spouse if married filing joint), or

– Any age if totally and permanently disabled

· Residency test. The person must live in the same principal residence as the individual for more than half of the tax year. Temporary absences due to special circumstances such as illness, vacation, education or military service are ignored.

· Support test. The person cannot provide over half of his or her own support. A full-time student does not take into account taxable or nontaxable scholarship payments received in calculating the support test.

· No joint return test. If married, the person must not have filed a joint return with the spouse. The only exception is when the only reason for filing a joint return is to claim a tax refund.

· “Tie-breaker” rules. In the event a person is the qualifying child of more than one person, the following chart summarizes the qualifying child “tie-breaker” rules.

Note: In the situation of a divorced couple, a custodial parent may release the dependency exception to the noncustodial parent. The tie-breaker rules in the chart above do not apply when a custodial parent releases the exemption in a divorce situation.

Qualifying Relative

A qualifying relative is a person who is not a qualifying child of anyone else and who meets the following three tests with respect to the individual claiming the person as a “qualifying relative”: (1) member of household or relationship; (2) gross income; and (3) support. These tests are further explained.

· Member of household or relationship test. The person must either:
– have lived in the individual’s household for all of 2020. This includes temporary absences such as those due to illness, education, business, or military service are ignored if it is reasonable to assume the person will return to the household;

– be related to the individual if any of the following ways apply:

□ child, stepchild, grandchild or great grandchild

□ brother, sister, half-brother, half-sister, stepbrother or stepsister

□ father, mother, grandparent

□ stepfather or stepmother

□ son or daughter of individual’s sibling or half-sibling

□ brother or sister of individual’s mother or father.

Note that: (1) a related person does not need to be a member of the individual’s household; and (2) a person who died during the year and was a member of the household until death meets the member of household test. A child who was born and died during the year meets the member of household test.

· Gross income test. The person must have received less than $4,300 of gross income during 2020. Gross income includes: (1) all taxable income in the form of money, property or services; (2) gross receipts from rental property (do not deduct any rental deductions/expenses); (3) a partner’s share of the gross (not net) partnership income; and (4) unemployment compensation, taxable scholarships, and fellowship grants. Gross income does not include tax-exempt income such as municipal bond interest and some scholarship benefits.

· Support test. The support test is met if: (1) the individual provided over 50 percent of the person’s support. Support includes amounts spent for food, lodging, clothing, education, medical, dental, recreation, transportation, and other necessities.

The following example illustrates a qualifying child:

Carol’s son Phillip is 21 years old and is not a full-time student nor is he disabled. Phillip’s gross income during 2020 was $2,700. Carol provides 60 percent of his support and Phillip’s grandmother provides the other 40 percent of his support. Phillip is not a qualifying child of any individual because he fails the age test. But Phillip is Carol’s qualifying relative for 2020. This is because Phillip meets the relationship test as Carol’s son. Carol meets the support test because she provides more than half of Phillip’s support, and Phillip meets the gross income test be4cause his gro9ss income was less than $4,300 during 2020.

Any questions concerning the qualify child and quality relative as they relate to the personal exemption benefit should be directed to a tax professional.