Why can't I claim my nephew as a dependent?

March, 30 2018 by Selena Quintanilla, CTEC

Yet again, my sister's irresponsibility was the topic of discussion at dinner. This time, the effect would be life-altering for me. (Let's call my sister Sara.)

Sara had decided to pursue her dream and would be leaving for a little over six months to study abroad in Puerto Rico. There was only one drawback: she had a 2-year-old son, Mason. Once she announced her decision, silence filled the room. I looked up from my bowl of tomato bisque soup to be met with the eyes of everyone at the table. It was clear that I would be taking on the role of Mason's guardian while my sister was away. Though caring for him full time would certainly be an adjustment, I didn't mind. I babysat Mason most days as it was, and I loved him like he was my own.

The following six and a half months flew by, and Sara returned just in time for tax season! Though she was in no rush to reclaim her responsibilities, she made it clear that she planned to claim Mason on her tax return. It was, as she stated, her "right." While Sara was away, I had educated myself on tax law and explained that, for tax purposes, Mason was now considered my qualifying child. To that, Sara uttered one word: "Explain."

A qualifying child must meet specific criteria, the first being relationship.

To be considered a "qualifying child," the child must be your son, daughter, adopted child, stepchild, foster child or a descendant of any of them, such as your grandchild. The child could also be your brother, sister, half-brother, half-sister, stepbrother, stepsister or a descendant of any of them such as a niece or nephew.

Mason was my nephew.

The next test would factor in age.

A "qualifying child" must be younger than you (or your spouse if filing jointly), and younger than 19 years old at the end of the filing year. There were other “age rules” that did not apply in our case.

Mason celebrated a birthday while Sara was away, but he would witness the rising and setting of many moons before his 18^th birthday.

Mason also had to meet the residency and citizenship tests. He would have had to live with me for more than half of the year and  be a U.S. citizen or meet other residency tests.

A U.S. citizen, Mason was under my care for a little over six months.

Another test focused on support. Mason could not have provided more than half of his own support for the year.

Though some extra income would have been nice, my job as a freelance copywriter brought in a little over $25,000, which was just enough to keep the bills paid and Mason happy.

The final test was that of filing status. To be a qualifying child, Mason cannot file a joint tax return for the year, unless he and his spouse were filing solely for a refund.

That one was easy. Mason wasn't married (unless he and his stuffed bear had eloped without my knowledge), and he would not be filing a tax return.

My final argument was the one I was sure would win me the debate: I made more money than Sara did.

Sara relied mostly on grants and a scholarship to fund her trip. However, she did work part-time before her departure, earning almost $11,000 to fund her shenanigans in Puerto Rico. With these figures in mind, the conclusion seemed simple: I should be able to claim Mason.

After hearing me out, Sara interrupted by stating that as Mason's mother she was entitled to claim him on her return, actual facts aside. After all, she had been away only for  a little over  six months. But, was she correct? 

Yes and no! Though all criteria were met on my end (and Mason's), and Sara did not meet all of the requirements to claim Mason as a qualifying child because she was not his custodial parent for IRS purposes, if she did claim him and the IRS got involved, Sara would likely  win. The reason is that the IRS generally sides with the parent against a nonparent, jumping straight to tiebreaker rules without first verifying that the tests have been met by both parties. The very first tiebreaker rule says that if more than one person qualifies to claim a single dependent, and one of the taxpayers is a parent of the dependent, the parent wins. And while a couple of the tie-breaker rules do favor the person with a higher AGI, those rules come into play only after the first two tie-breaker rules.

Keep in mind, had Sara agreed to let me claim Mason as my dependent, the IRS likely wouldn't have been opposed, but since she is very much in the picture and adamant about claiming her son, my argument, though persuasive, is futile.

NOTE: With the new tax legislation recently signed into place, personal and dependent exemptions are no longer applicable. However, Mason can still be claimed as a qualifying child for the Child Tax Credit, which has seen a boost from $1,000 to $2,000, beginning this year, courtesy of Congress. The refundable portion of this credit has been bumped to $1,400, with a nonrefundable credit of up to $500 for qualifying dependents that are not qualifying children. And don’t get me started on the complicated Filing Status rules involved in this situation!