Deciding whether to claim a child as a dependent on tax returns requires careful consideration. While claiming dependents often maximizes tax benefits, there are situations where not claiming a child can provide financial advantages. This decision can influence income brackets, eligibility for subsidies, and access to financial aid.
Child’s Independent Tax Filing Possibilities
A child’s income level is central to determining whether they should file taxes independently. Filing requirements for dependents vary by the type and amount of income, and they change over time. Families should check the current IRS rules for dependents to see when a child must file a return.
Parents can sometimes choose to report a child’s interest and dividend income on the parent’s return instead of the child filing, by making the election on Form 8814. This election is available only when specific conditions are met and, if used, the child does not file a separate return for that income. 1Internal Revenue Service. Topic No. 553 Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
Independent filing can allow a child to claim education credits such as the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC) if they are not listed as a dependent and otherwise qualify. If a student is claimed as a dependent on someone else’s return, that student cannot claim these credits. 2Internal Revenue Service. Education Credits — AOTC and LLC
Influence on Parent’s Income Brackets
Not claiming a child as a dependent does not, by itself, reduce a parent’s adjusted gross income or move the parent into a lower tax bracket, because a child’s wages are not included in the parent’s return. The main exception is when parents elect to report a child’s interest and dividends on their own return using Form 8814, which adds that income to the parent’s return.
This decision also affects which credits are claimed and by whom. For example, the phase-out for the Child Tax Credit begins at $200,000 for single filers and $400,000 for married couples filing jointly for tax years through 2025. 3Internal Revenue Service. What You Need To Know About CTC, ACTC and ODC
Access to Certain Education Aid
Dependency status for federal student aid is determined by federal student aid rules, which are set by law and differ from IRS tax dependency rules. Many students under age 24 are considered dependent for FAFSA purposes unless they meet specific criteria (for example, being married, a veteran, or having legal dependents), so not being claimed on a tax return does not automatically make a student independent for federal aid. 4Federal Student Aid. Completing the FAFSA Form: Steps for Parents
State-specific programs and institutional aid use their own formulas and may consider FAFSA results, but families should review each program’s guidelines before assuming that changes to tax dependency will increase aid.
Effect on Healthcare Subsidies
Dependency status can impact health insurance subsidies under the Affordable Care Act because Marketplace savings are based on the “tax household.” Generally, your Marketplace household includes the tax filer, their spouse, and individuals they will claim as tax dependents for that year. If a child isn’t claimed as a dependent, they are typically not included in the parent’s Marketplace household, which can change eligibility and the amount of premium tax credits. 5HealthCare.gov. Who To Include In Your Household
Reallocation of Credits Among Family Members
Not claiming a child as a dependent can shift which taxpayer is eligible to claim certain education credits for that student, subject to IRS rules on who paid the expenses and whether the student is a dependent.
However, the Child Tax Credit cannot be freely transferred among family members. Only one taxpayer can claim a child, and special rules apply for divorced or separated parents. In general, the custodial parent claims the child, but the noncustodial parent may claim the Child Tax Credit if the custodial parent releases the claim using Form 8332. 6Internal Revenue Service. Dependents — Children of Divorced or Separated Parents