Especially when onboarding new hires or updating W-4s among existing employees, it’s essential for employees to understand who qualifies as a dependent and for which tax deductions or credits they are eligible. Employers must ensure that best practices (and requirements) related to withholdings, credits, and deductions are clearly understood by their workforce so that payroll taxes remain accurate and tax season is surprise-free for employees, HR staff, and the business itself.
In this article, we’ll explore how claiming dependents can reduce an employee’s tax burden and how working with a qualified payroll provider can help your business and employees navigate tax deductions, filing status, tax credits and more.
What is a Dependent?
A dependent is most commonly a child or relative (spouse, family member) who lives with a taxpayer/individual and relies on their financial support. Whether claiming a qualifying relative or qualifying child as a dependent, a taxpayer can leverage this filing status to receive tax credits ranging from the Child Tax Credit, Child and Dependent Tax Credit, Earned Income Tax Credit, or the American Opportunity Tax Credit. They may also qualify for deductions for medical, dental or student loan interest payments, which we’ll discuss in a later section. Additionally, a dependent can typically qualify a taxpayer for a dependency exemption, which decreases taxable income. Although the usual deduction for dependency exemptions is suspended until 2025, other tax credits remain available.
Rules for Claiming a Dependent on Your Tax Return
As a baseline qualification for a person to claim someone as a dependent, they must have provided more than 50% of the dependent’s financial support in a given tax year.
To qualify as a dependent, an individual must also meet certain guidelines dictated by three tests in the Internal Revenue Code (IRC). They are as follows:
- The dependent taxpayer test - A person who is claimed as a dependent can not claim another individual as a dependent on their own tax return.
- The joint return test – A person filing a joint return as part of a married couple is ineligible to be claimed as a dependent on another tax return.
- Resident test – A person who is claimed as a dependent must be either a U.S. citizen, resident immigrant, or national. They may also qualify if they are a resident of Canada or Mexico.
For married couples that are filing jointly, it’s possible for both individuals to claim the same dependents and evenly share tax benefits. Among married or unmarried parents who file individually, only one taxpayer is eligible to claim the dependent on their income tax return. In most cases involving divorced or separated parents, dependency claims tend to favor the custodial parent, though the claim is sometimes released to the noncustodial parent based on legal proceedings or voluntary rescinding of the claim by the custodial parent.
Types of Dependents
As we’ve discussed, there are two main types of dependents: a qualifying child or a qualifying relative. In this section, we’ll explore the specific requirements to make these claims, and also outline the circumstances under which you could claim a non-relative as a dependent.
A series of IRC tests are used to gauge the eligibility of an individual as a dependent. First, the IRC relationship test determines whether an individual is a qualifying child who may be claimed as a dependent by a taxpayer/individual based on their relationship. The child must be one of the following:
- The individual’s daughter, son, stepchild, foster child (verified by a placement agency) or a descendent of any of the above.
- A child may also qualify as a dependent if they are the individual’s sister, brother, half-sibling, step-sibling or a descendent of any of the above.
The IRC age test outlines the following requirements:
- A qualifying child must be under the age of 19 at the conclusion of the claimed tax year. The qualifying child must also be younger than the individual taxpayer or the taxpayer’s spouse when filing jointly.
- A child may qualify as a dependent up to the age of 24 assuming they are enrolled as a full-time student and younger than the individual taxpayer or the taxpayer’s spouse when filing jointly.
As with other IRC dependent qualifications, a qualifying child must not provide more than 50% of their own financial support during a tax year that they are claimed as a dependent. Additionally, the IRC resident test requires that a child who is claimed as a dependent must have lived with the individual/taxpayer for at least six months of the tax year. Some exceptions apply. If, for instance, the child (or the individual claiming them as a dependent) is absent because of military service, an illness, hospital care, or a range of other circumstances, then the child and/or taxpayer are considered ongoing residents.
When the IRC tests alone raise questions or doubts about an individual’s eligibility to qualify as a qualifying child, it’s possible to claim a dependent as a qualifying relative, assuming they meet certain conditions. Specifically, they must be definitively disqualified as a qualifying child and pass the following tests:
- Relationship or Member of Household Test – The dependent must be related to the individual/taxpayer or live as a full-time (year-round) member of the individual’s/taxpayer’s household.
- Support Test – Similar to other IRC qualifications regarding dependents, the taxpayer must have provided over 50% of the dependent’s financial support for the claimed tax year.
- Gross Income Test – A dependent’s gross income must be less than the established threshold amount for a given tax year. In 2023, the amount is $4,700, a $300 increase from 2022.
Can You Claim a Non-Relative as a Dependent?
In some cases, you can claim your partner (not spouse) as a dependent. In this case, they must have earned less than $4,700 over the tax year and lived with you in the same residence for the entire year. You also must have provided over 50% of their financial support for the qualifying tax year. The usual credits and deductions are available to the taxpayer in this case, as though they are a legal relative.
Credits and Deductions Available When Claiming Dependents
Whether you make a dependency claim for a qualifying child, qualifying relative or otherwise, you are typically eligible for a number of tax credits or deductions. This can lower your tax bill and incorporate refundable tax credits. Below, we’ll explore the different credits and deductions for which you may be eligible when claiming a dependent. Bear in mind the moratorium on personal and dependency exemptions until 2025 does not impact tax credits.
Earned Income Tax Credit (EITC) – This credit applies to individuals or married filers who earn under a certain threshold (between $46,560 - $63,698, depending on the number of claimed dependents). They can receive a tax credit of $3,995 for 1 qualifying child, $6,604 for 2 qualifying children, or $7,430 for 3 or more qualifying children.
American Opportunity Tax Credit – Taxpayers who are helping a dependent pay for college-related expenses may be eligible for the AOTC.
Child Tax Credit – Taxpayers claiming a qualifying child as a dependent may be eligible for up to $3,000-$3,600 in tax credits with a large portion being refundable.
Child and Dependent Tax Credit – This applies to taxpayers who provide care and financial support to a dependent while working.
Deductions for Student Loans and Medical & Dental Expenses – In 2025 and beyond, it is likely that student loan interest deductions will resume. If taxpayers are assisting with payments towards student loan interest, they may be eligible for a deduction of up to $2500 or more. Similarly, medical or dental expenses exceeding 7.5% of a taxpayer’s income – and paid for by a taxpayer on a dependent’s behalf – are generally eligible for deduction.
FAQs About Claiming Dependents
What is a dependent?
A dependent is an individual who depends on another individual/taxpayer for financial support. A dependent is most commonly a qualifying child, qualifying relative, or another person depending on the individual/taxpayer for financial support (an unmarried partner, for example).
Why claim someone as a dependent?
When you claim another individual as a dependent, it allows you to qualify for a range of tax credits, including the EITC, American Opportunity Tax Credit, Child Tax Credit, Child & Dependent Tax Credit, and a range of personal or dependency deductions. These can lower your overall tax bill.
What qualifies someone as a dependent?
Based on IRS requirements (and specifically, IRC test guidelines), a dependent is a qualifying relative or child who depends on another individual/taxpayer for financial support, receiving more than 50% of their support from the taxpayer. A range of other qualifications and criteria (age, relationship, length of stay in shared residence and more) apply based on the category of dependent you choose to claim.
How much is the Tax Credit for each dependent?
Tax credits provided per dependent vary based on the type of tax credit you claim. As just one example, childless households may receive up to $600 in 2023 for the Earned Income Tax Credit while taxpayers may receive up to $3,000 to $3,600 in tax credit per child in 2023.
Optimize Payroll and Employee Satisfaction
Guiding employees through deductions, tax benefits and W-4s can be a challenge without access to leading-edge software and dedicated expert support. Discover how we can help you optimize your employee compensation strategy by managing the role of dependents. Take the first step towards learning how our advanced HR tools can streamline your processes, boost employee satisfaction, and help you stay compliant with ease.