Welcome back. Looking at the individual tax formula, we've already considered income, exclusions, for AGI deductions, and one type of from AGI deduction- that's the greater of the standard deduction or itemized deductions. Prior to the Tax Cuts and Jobs Act of 2017, the next item in the income tax formula would have been a deduction for personal and dependency exemptions. These were from AGI deductions of a fixed-dollar amount, $4,050 in 2017. And these were for yourself, your spouse, and every person you claimed on your tax return as a dependent. But, the Tax Cuts and Jobs Act temporarily suspended this deduction. Meaning it's not available to be claimed by taxpayers until this provision sunsets or expires at the end of 2025, along with most of the other Tax Cuts and Jobs Act individual changes. But, even though the deduction for personal and dependency deductions is no longer part of the income tax formula right now, the rules that you use for who you can claim as a dependent remain very important. That's because whether you can claim a particular individual as a dependent can still impact your filing status. Something we'll talk a bit more about in a later lesson. In addition, who you can claim as a dependent can provide you with a tax credit. As a reminder, tax credits provide a dollar-for-dollar offset against your total tax bill. So for example, if you were to owe $100 in taxes, a $100 tax credit would reduce your tax liability down to zero. There are two types of credits, either nonrefundable or refundable. Nonrefundable credits can reduce your tax bill down to zero, like the example I just mentioned, but they can not result in you receiving more money back from the IRS as a result of the credit. On the other hand, refundable credits can not only offset any tax that you owe, they can even result in a refund to the taxpayer. Let's try another example. Suppose a taxpayer has $100 tax liability and a $150 tax credit. If that credit is nonrefundable, the taxpayer's tax liability is reduced to zero, but the excess $50 may be lost or carried forward to a future year depending on the particular credit. But if that $150 tax credit was refundable, then not only would the $100 tax be wiped out, but the taxpayer would receive a check, or a refund, for the excess $50. So, now that we touched on how tax credits work, let's get back to how we qualify for one based on the dependents we claim on our tax return. Beginning in tax year 2018, there is a Child Tax Credit equal to $2,000 per qualifying child claimed on your tax return. Prior to 2018, this credit was only $1,000 per child. So the Tax Cuts and Jobs Act doubled this credit, at least until the provision expires at the end of 2025. And of the $2,000 credit now available, up to $1,400 of that credit is refundable, with the remaining $600 being nonrefundable. So how do we get this $2,000 credit? Well, first we have to have a qualifying child under the age of 17. We'll talk about who's a qualifying child in just a moment. But even if you don't have a qualifying child under the age of 17, you may still be eligible for a nonrefundable $500 credit per non-child dependent. So what dependents qualify a taxpayer for what credits? And this is where those old rules about who you can claim as your dependents become so important. Because they are, for the most part, unchanged by the recent tax law changes. What has changed is the benefit you receive for them. So instead of an exemption amount, which is a from AGI deduction, plus a potential Child Tax Credit, we now just have a greatly expanded Child Tax Credit and Nonchild Dependent Tax Credit. So, there are two types of dependents you can claim on your tax return, qualifying children and qualifying relatives. But before we get started, let's get one thing out of the way as a threshold matter. A dependent can only be claimed by one taxpayer. So first, to qualify as either a qualifying child or qualifying relative eligible to receive either the Child Tax Credit or the Nonchild Dependent Tax Credit, the dependent must be a citizen or a resident of the United States. Under the old dependency exemption, a resident of Mexico or Canada could qualify, but they don't qualify now for these tax credits. Second, the potential dependent can not file a joint return with their spouse if they are married unless they are filing that joint return solely to get a refund of taxes withheld. That's the joint return test. So with these two general rules in place, let's take a look at some of the more detailed rules for each status. To be a qualifying child, the potential dependent must also meet four more tests: the relationship test, the age test, the residence-or abode- test, and the support test. An individual has to pass every test. If one test is not met, that individual is not a qualifying child. First, the relationship test. The qualifying child must have a lateral or descendant relationship with the taxpayer. This means that the child must be the taxpayer's son, daughter, step-daughter, brother, sister, step-brother, or step-sister, or a descendant of one of those individuals. So a grandchild, or niece, or nephew, could be classified as a qualifying child. Adopted children and foster children can also qualify. To help us visualize lateral or descendant relations, let's take a look at a family tree. Here, a lateral family member means that you cannot go up the family tree, then across and down the tree, for the person to be counted as a qualifying child. You can go directly across, that is laterally, meaning your brothers and sisters, and then go down from there. Or you can go directly down from yourself to your children and their children. You can't go up the tree for a qualifying child. So for example, you cannot claim your parents. You also cannot claim your aunts and uncles as qualifying children. In addition, you can't claim your cousin under the relationship test, because a cousin is a parent's sibling's child. So you're going up the family tree, then across to a sibling, and then down. So cousins are not qualifying children. The next test for a qualifying child is the age test. First, the child must be younger than the individual claiming the child. Second, the child must also be under the age of 19 or, if he or she is a full-time student, under the age of 24. Or if the child is permanently and totally disabled, they can be of any age. So even if you're 22 years old, your parents could still claim you as a qualifying child if you were a full-time student at an accredited educational institution, and assuming you meet all the other requirements. Likewise, a 30-year-old child could still be claimed as a qualifying child if they were permanently and totally disabled. But here's where things get a little complicated. A qualifying child who is age 17 or over is only eligible for the $500 Nonchild Dependent Tax Credit, and not the more lucrative $2,000 Child Tax Credit. In other words, not all qualifying children are qualifying children for the Child Tax Credit. We'll touch on this point a bit more later in the video. Now, getting back to the test for a qualifying child. The third test is the residence, or abode, test. Here, the child has to live with the taxpayer for more than half the year, but temporary absences due to special circumstances, like medical treatment or education, don't count. For example, if there's an illness and the child is in the hospital, the child is treated as living at home during the hospital visit. Likewise, if your child goes away for boarding school or for college, they'll still meet the abode test, because we ignore the absence due to special circumstances, and continue to treat the child as if they lived at home. Now, what about for the child of separated parents, who may split time between two households? Well, here, by default, the parent that spends more than half the year with the child, we call them the custodial parent, is going to win the residence test. But there is a way for that custodial parent to release or give the ability to claim the child to the other parent, the noncustodial parent. This commonly occurs if the tax benefits of claiming the qualifying child are worth more to the noncustodial parent than the custodial parent. The final test for a qualifying child is the support test. Here, the child must not provide more than 50% of his or her own support. And when we talk about support, we're talking about who's providing for housing costs, for medical expenses, food, and other caretaking items. Here, scholarships are not considered as part of the support calculation if the child is a full-time student and is being claimed by their parents. But if a non-parent is attempting to claim the child, well, then we're going to have to factor scholarships into the support test. So what happens if a potential dependent fails one of the tests for being a qualifying child? Well, then the taxpayer can check to see whether that potential dependent is a qualifying relative instead, which we'll discuss in our next video. Along with the credits available to both qualifying children and qualifying relatives.
