It’s no secret that the IRS comes with its own language, and it can be difficult for the average taxpayer to understand the meaning of key terms.

Take “dependents” and “exemptions” … they are two different things but combined you get the “dependent exemption” … which is currently zero for the tax year 2023!

But wait, don’t I get an exemption for my child dependents? Yes, but that comes under the Child Tax Credit.

Confused yet? Let’s rewind and review some of the key terms.

Key IRS Terms for Dependents and Exemptions

Here are the key terms to keep in mind:

• Dependents: A dependent is a person other than the taxpayer or their spouse who relies on the taxpayer for financial support. Dependents can be children, relatives, or even non-relatives who meet specific criteria set by the IRS. To qualify as a dependent, the person must be a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico. The taxpayer must provide more than half of the dependent's financial support during the tax year.
• Exemptions: Exemptions were a feature of the U.S. tax system before the Tax Cuts and Jobs Act of 2017. They reduced a taxpayer's taxable income by a fixed amount for each exemption claimed. There were two types of exemptions: personal exemptions and dependency exemptions. Personal exemptions were for the taxpayer and their spouse, while dependency exemptions were for qualifying dependents. However, as of the 2018 tax year, personal and dependency exemptions have been suspended until 2025.
• Child Dependency Exemptions: Before the Tax Cuts and Jobs Act of 2017, taxpayers could claim a child dependency exemption for each qualifying child. A qualifying child had to meet certain age, relationship, residency, and support tests. The child dependency exemption allowed taxpayers to reduce their taxable income by a fixed amount for each qualifying child. However, as mentioned earlier, these exemptions have been suspended until 2025.
• Child Tax Credit: The Child Tax Credit is a credit available to taxpayers with qualifying children. Unlike exemptions, which reduce taxable income, tax credits directly reduce the amount of tax owed. As of the 2023 tax year, the Child Tax Credit provides a credit of up to $2,000 per qualifying child under age 17. To be eligible, the child must be the taxpayer's son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or descendant of any of them. The credit begins to phase out for higher-income taxpayers. Additionally, up to $1,500 of the credit is refundable, meaning that even if the credit exceeds the amount of taxes owed, the taxpayer may receive a refund for a portion of the credit.

“It's important to note that tax laws can change over time, so it's always a good idea to consult with a tax professional or refer to the most recent IRS guidelines for the most up-to-date information,” notes seasoned tax pro, Steve Powell.

General Rules for Dependents

Remember that a dependent is a qualifying child or relative who relies on you for financial support. To claim a dependent for tax credits or deductions, the dependent must meet specific requirements.

The IRS says these rules generally apply to all dependents:

• A dependent must be a U.S. citizen, resident alien or national, or a resident of Canada or Mexico.
  
  
• A person can't be claimed as a dependent on more than one tax return, with rare exceptions.
  
  
• A dependent can't claim a dependent on their own tax return.
  
  
• You can't claim your spouse as a dependent if you file jointly.
  
  
• A dependent must be a qualifying child or qualifying relative.
  
  

Difference Between a Qualifying Child and Qualifying Relative

Dependents do not always have to be a child – they can also be a relative.

To qualify as a dependent, a child must pass these tests:

• Relationship: Be your son, daughter, stepchild, eligible foster child, brother, sister, half-sister or -brother, stepbrother, stepsister, adopted child, or the child of one of these.
  
  
• Age: Be under age 19 or under 24 if a full-time student, or any age if permanently and totally disabled.
  
  
• Residency: Live with you for more than half the year, with some exceptions.
  
  
• Support: Get more than half their financial support from you.
  
  
• Joint return: Not file as married filing jointly unless only to claim a refund of taxes paid or withheld.
  
  

A qualifying relative must meet general rules for dependents and pass these tests:

• Not a qualifying child: Isn't your qualifying child or the qualifying child of any other taxpayer.
  
  
• Member of household or relationship: Lives with you all year as a member of your household or is a specific type of relative.
  
  
• Gross income: Has gross income under $4,700.
  
  
• Support: Gets more than half their financial support from you.
  
  

Dude! Where Did “My Exemptions” Go To?

Personal and dependent exemptions are no longer used on federal tax returns. They were eliminated starting with the tax year 2018. There are two main reasons for this change:

• Tax Cuts and Jobs Act (TCJA): This 2017 law aimed to simplify the tax code. Exemptions were seen as complex and potentially confusing for some filers.
  
  
• Increased Standard Deduction: The TCJA also nearly doubled the standard deduction. This is a set dollar amount you can subtract from your taxable income, regardless of your actual expenses. The idea was that for many people, the higher standard deduction would be more beneficial than claiming individual exemptions.
  
  

So, why do tax forms still include exemptions with a value of $0? There are a couple of reasons:

• Software Compatibility: Tax filing software needs to be compatible with older tax years, so they may still include exemptions for consistency.
  
  
• Future Changes: It's always possible that tax laws could change again and exemptions could be brought back. Keeping the exemption line on the form allows for easier re-implementation if needed.

So, while exemptions are gone, claiming your child as a dependent for the Child Tax Credit can be beneficial.

Relief for Parents: Child Tax Credits

The Child Tax Credit helps families with qualifying children get a tax break. You may be able to claim the credit even if you don't normally file a tax return.

You can claim the Child Tax Credit for each qualifying child who has a Social Security number that is valid for employment in the United States.

To be a qualifying child for the 2023 tax year, your dependent generally must:

• Be under the age of 17 at the end of the year.
  
  
• Be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of one of these (for example, a grandchild, niece, or nephew).
  
  
• Provide no more than half of their own financial support during the year.
  
  
• Have lived with you for more than half the year.
  
  
• Be properly claimed as your dependent on your tax return.
  
  
• Not file a joint return with their spouse for the tax year or file it only to claim a refund of withheld income tax or estimated tax paid.
  
  
• Have been a U.S. citizen, U.S. national, or U.S. resident alien.
  
  

You qualify for the full amount of the 2023 Child Tax Credit for each qualifying child if you meet all eligibility factors and your annual income is not more than $200,000 ($400,000 if filing a joint return).

Parents and guardians with higher incomes may be eligible to claim a partial credit.

Use this Interactive Tax Assistant to check if you qualify for the Child Tax Credit.

Of course, dependents, exemptions, dependent exemptions, and the Child Tax Credit are just the tip of the iceberg to understanding our nation’s byzantine tax code.

The tax professionals at Powell Tax Law are available to help you and your family navigate the IRS tax maze. Call today for a free consultation.