There are a number of ways that children can impact your taxes, and I am going to use the next several posts to examine them. First up is one of the simplest, which is the effect on exemptions.
What is an exemption? On your federal tax return, you are allowed one personal exemption for yourself, and one for your spouse if you are married. Each exemption reduces your taxable income by $4,050 for tax year 2016.
There are five tests that must be met to claim a child for a dependent exemption. The first test is the relationship test. To meet this test, a child must be:
Your son, daughter, stepchild, foster child, or a descendant (for example, your grandchild) of any of them, or
Your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant (for example, your niece or nephew) of any of them.
The second test is the age test. To meet this test, a child must be:
Under age 19 at the end of the year and younger than you (or your spouse, if filing jointly),
A student under age 24 at the end of the year and younger than you (or your spouse, if filing jointly), or
Permanently and totally disabled at any time during the year, regardless of age.
The third test is the residency test. To meet this test, your child must have lived with you for more than half the year. There are exceptions for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents.
The fourth test is the support test. To meet this test, the child can’t have provided more than half of his or her own support for the year.
The fifth test is the joint return test. To meet this test, the child cannot file a joint return for the year.
If a child meets all of these tests, then the child can be claimed as a dependent. Next up is how children affect the standard deduction.