Quite frequently readers will ask how they can resolve disagreements among family members over who get's to claim a dependent. It's helpful to start with some ground rules, and my number one rule here is to prevent (if at all possible) the IRS from getting involved in family disputes. Now the IRS will get involved only if two or more people attempt to claim the same person as a dependent. So if at all possible, it's best to resolve your differences before anyone has filed their tax return.
In some situations, it's not easy or practical or even desirable to resolve a dispute. And here's where the tax rules can come to your aide. The underlying tax law spells out several tie-breaker tests, and these can be used ahead of time for resolving conflicts. The tie-breaker tests operate in the following order:
- If one person can claim a dependent under the qualifying child criteria and another person can claim a dependent under the qualifying relative criteria, then the qualifying child rules prevail.
- If two or more persons can claim a dependent under the qualifying child criteria, then the parent prevails.
- If both parents can claim the dependent as a qualifying child, then the parent with whom the child resided for the longest period of time during the year prevails.
- If the child resided with both parents equally during the year, then the parent with the highest adjusted gross income prevails.
- If two or more people can claim the dependent as a qualifying child and if neither person is a parent, then the person with the highest adjusted gross income prevails.
In other words, the tie-breaker tests narrow down the field of possible people who can claim the dependent until just one taxpayer is left.
Let's see how this works with a real life example I found in comment #176 of a previous blog post about dependents. The situation is this: there exists a family. The birth mother resides with her parents (let's assume for the whole year). The father lives in a separate residence. Their daughter resides an equal amount of time with both the father and the mother.
First thing we notice is that the daughter would fulfill the qualifying child criteria for three different taxpayers: the mother, the father, and the grandparents. The first tie-breaker tests doesn't apply, since no one is attempting to claim the daughter as a qualifying relative. The second tie-breaker test comes into play to award the dependent to the parents; so the grandparents are out of the picture. The third tie-breaker test doesn't help much, because the commenter stated that the daughter resides equal amounts of time at her father's and her mother's house. So it turns out that the fourth tie-breaker test is crucial: here the dependent goes the the parent with the highest adjusted gross income. That information wasn't mentioned in the blog comment, so we don't know which of the two parents gets to claim the daughter.
Now, it turns out that the mother in our example has already allowed the father to claim her daughter. So for our purposes, the decision process is over. The two parents have decided among themselves. But, the commenter continues, it's the grandparents who are pressuring to claim the daughter. Now, as a tax preparer, I don't like getting into these family situations, but these are real issues with real money at stake. I think the best that a tax preparer can do is help a family walk through the tie-breaker tests and figure out what's going to pass muster with the IRS.
And being able to survive IRS scrutiny provides financial protection. The IRS uses these same criteria in situations where it receives two (or more) tax returns each claiming the same dependent. The IRS does not know, right off the bat, which tax return is the correct one. So the IRS will a guess by granting the dependent to one person and denying the dependent to the other taxpayers. The taxpayer who has lost a dependent can fight the IRS's decision and have an opportunity to prove they are the most eligible person to claim the dependent. In doing so, the taxpayer will need to demonstrate not just that they are eligible to claim the dependent, but also that they meet the tie-breaker tests. The results of losing a dependent in an audit situation can be a serious financial setback, since a taxpayer may have also claimed other tax incentives related to that dependent, such as head of household status, the earned income credit, or the child tax credit. Having to pay back these tax incentives, plus interest, is no small feat, but this financial situation that can be prevented by first looking to the tie-breaker tests before filing a tax return.