The IRS continues to publish guidance to clarify provisions of the Tax Cuts and Jobs Act (TCJA). Here’s what you need to know about qualifying for the new $500 tax credit for dependents and beneficial head of household (HOH) filing status based on having a non-qualifying-child dependent.
New Non-Qualifying-Child Dependent Credit
For 2018 through 2025, the TCJA established a new $500 tax credit for dependents who aren’t under-age-17 children who qualify for the child tax credit. (See “Close-Up on Child Tax Credit” at right.) However, these non-qualifying-child individuals must pass an income test to be classified as a dependent.
Under the tax code, a qualifying dependent for purposes of the $500 credit includes:
- A dependent child who lives with you for over half the year and is over age 16 and up to age 23 if he or she is a student, and
- Other non-child dependent relatives (such as a grandchild, sibling, stepbrother, stepsister, father, mother, grandfather, grandmother, stepfather, stepmother, niece, nephew, uncle, aunt, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law).
To be eligible for the $500 credit, you must provide over half of the person’s support for the year and he or she must be a U.S. citizen, U.S. national or U.S. resident. Individuals who aren’t relatives can also be qualifying dependents if they meet the preceding requirements and live with you as a member of your household for the year.
However, it was unclear if a person would qualify you for the $500 credit if he or she had any gross income for the year. That’s because the statutory language says a person can’t have gross income in excess of the dependent exemption deduction amount to be classified as your dependent. This restriction is called the income test.
Under the TCJA, for 2018 through 2025, the dependent exemption deduction is deemed to still exist, but it equals $0. So, based on the statutory language, a dependent could pass the income test only if he or she has no gross income. That interpretation would have made eligibility for the $500 credit rare.
Fortunately, IRS Notice 2018-70 favorably resolves the income test question. According to the guidance, soon-to-be-released proposed regulations will clarify that a dependent will pass the income test for 2018 if he or she has gross income of $4,150 or less. That’s what the dependent exemption deduction would have been for 2018 if the TCJA hadn’t passed. (The $4,150 amount can be adjusted for inflation in future years.)
So, for 2018, your non-qualifying-child dependent passes the income test if his or her gross income is $4,150 or less. You can rely on this conclusion until the proposed regulations are issued.
HOH Filing Status
The same income test issue is relevant for determining whether you qualify for HOH filing status based on having a non-qualifying-child dependent. A common — and expensive — error for some people is filing as a single taxpayer when more beneficial HOH filing status is available. Compared to single taxpayers, heads of households are entitled to wider tax brackets and bigger standard deductions. So, using HOH filing status could save eligible taxpayers significant tax dollars. The dependent income test is important here, too.
If you’re unmarried and could claim a dependent exemption deduction for a relative, you’re eligible for HOH filing status if you also pay over half of the cost of maintaining a household that’s the principal home for you and that relative for over half the year. Under the statutory language of the TCJA, for 2018 through 2025, the dependent exemption deduction is deemed to still exist, but it equals $0.
But the dependent exemption deduction is only allowed if the dependent relative passes the gross income test. For 2018, that means having gross income of no more than $4,150, according to IRS Notice 2018-70. You must also pay over half of the relative’s support for the year.
For purposes of HOH filing status eligibility, the term “relative” means your brother, sister, stepbrother, or stepsister, father or mother or an ancestor of either, stepfather or stepmother, son or daughter of a brother or sister, brother or sister of your father or mother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
You can also claim HOH filing status based on having a dependent non-relative if that person has the same principal place of abode as you for the tax year and is a member of your household for that year. The dependent non-relative must also pass the income test, and you must pay over half of his or her support for the year.
Example: In 2018, Chris, an unmarried individual, pays over half the support for a 26-year-old niece who has minimal income for the year. She lives with Chris for nine months out of the year, and Chris pays more than half the cost of maintaining the household that they share. For 2018, the niece is a qualifying dependent relative for purposes of both the $500 dependent credit and HOH filing status eligibility.
Close-Up on the Child Tax Credit
Under prior tax law, the child credit was $1,000 per “qualifying child.” But the credit was reduced for married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000. The phaseout thresholds were $75,000 for unmarried taxpayers and $55,000 for married couples filing separately.
For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) doubles the child credit to $2,000 per qualifying child under the age of 17. The TCJA also substantially increases the phaseout thresholds for the credit. For 2018 through 2025, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of $1,000) by which their AGI exceeds $400,000. The threshold is now $200,000 for all other taxpayers.
So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit. But, keep in mind that these phaseouts aren’t indexed for inflation.
In addition, under current law, the refundable portion of the credit has been increased to a maximum of $1,400 for each qualifying child. And the earned income threshold has been decreased to $2,500 (from $3,000 under prior tax law) — which could potentially result in a larger refund.
Do You Have Qualifying Dependents?
Thanks to IRS Notice 2018-70, a non-qualifying-child dependent can make you eligible for the $500 tax credit for 2018 as long as his or her gross income is less than $4,150. If you’re unmarried, that person can also make you eligible for beneficial head of household filing status. For more information, contact your tax advisor.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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