Don't Mess With Taxes

A tax credit for dependents offers a break for older children, extended family members, and even non-relatives.

Thanksgiving is the traditional time for families to gather. But not all families are traditional.

That's evident in real and tax life.

The family-friendly tax break that's been getting most attention of late is the Child Tax Credit (CTC) and the advance payments for 2021 that are going out through December. I'm guilty, as a perusal of the ol' blog quickly shows.

But some families aren't eligible for the CTC, either the money being distributed now or when they file their annual tax returns next year.

In some cases, taxpayers don't qualify because they make a lot of money, at least according to the tax code. Others aren't eligible because their youngsters are too old, again according to the tax laws.

But there's still some tax relief hope for these folks. They might be able to claim the Credit for Other Dependents.

Direct tax debt reduction: This $500 tax credit was created as part of 2017's Tax Cuts and Jobs Act (TJCA). It's sometimes referred to as the Family Tax Credit or, thanks to tax wits, Non-Child Tax Credit.

And of course, the Credit for Other Dependents also has an official Internal Revenue Service acronym. But since COD already is used for cash or collect on delivery (which could apply to IRS operations, too, but I digress), the tax agency has flipped the wording for the abbreviation. It's called ODC for other dependent credit.

But whatever name you use, since it's a tax credit, it could reduce any tax you owe dollar-for-dollar.

Depending on what you owe, the Credit for Other Dependents could knock your tax bill down to zero. It is, though, nonrefundable, meaning that if you have more of the credit than a tax liability, you won't get the excess back as a refund.

But I don't know anyone who'll argue with being able to not owe Uncle Sam a dime.

Like all individual tax provisions of the TCJA, the Credit for Other Dependents, or ODC, is in the Internal Revenue Code through the 2025 tax year unless federal lawmakers decide to extend it.

However, that's still a few years down the road. Let's look at how it works now.

Qualifying dependents: To claim the Credit for Other Dependents, you and your family members must meet certain conditions. These include:

• dependent children age 17 or older, such as youngsters who are in college;
• children with an Individual Taxpayer Identification Number (ITIN) instead of a Social Security number, which is required to claim the Child Tax Credit;
• dependent who is a U.S. citizen, U.S. national or U.S. resident alien, and
• adult dependents, such as relatives or others who aren't related to you, but who depend on you for most of their support.

Note that last group of potential tax dependents, the adults you can claim in connection with the Credit for Other Dependents.

Adult dependents for many folks will be actual relatives, such as elderly parents who rely on you for financial as well as emotional support. However, it's not limited to formal family members.

Any adult who depends on you for support could qualify as long as that person meets the following four tests.

1. He or she is not your qualifying child.
A child cannot be your qualifying relative for other dependent purposes if the child meets the dependent child requirements for the Child Tax Credit (CTC). Those are detailed in my post on the 5 tests a child must meet to be your tax dependent.

For most families, that's not an issue since when it's available, they'll want to claim the substantially larger and refundable CTC for qualifying children. Refundable means just what is says. You get money back as a refund if there is some of the credit left after offsetting any due taxes.

2. The person must be a member of your household or meet the relationship test.
Let's look first at the with the relationship test since the IRS spells out who qualifies here. It is a person or any age who is related to you in a variety of ways noted in the box to the left. 

In addition, these designated relatives don't have to live with you for the full year, something many of us are thankful for from tax and personal space perspectives!

If, however, the person is not an actual relative, he or she could qualify as one for tax purposes if she or he lived with you for the whole year. Yes, all 365 days (or 366 in a Leap Year).

And yes, that means you might be able to claim that lay-about boyfriend that you still haven't broken up with. (Non-tax piece of advice: Consider making this the year that you send him packing.)

3. She or he must meet the gross income test.
What the IRS is looking for here is how much money the potential dependent made. For the 2021 tax year, the person's earnings cannot exceed $4,300. The amount is bumped up by inflation for the 2022 tax year to $4,400 for the 2019 tax year.

So that deadbeat boyfriend (yes, I'm still picking on him; you deserve better!) who can't even hold a temp job clears this hurdle.

4. The support test must be met.
This is the corollary to the gross income test. Here the IRS looks at what you, the person claiming the credit, contribute to the potential dependent's well-being.

Generally, you must provide more than half of a person's total support during the calendar year.

If you're dealing with a fiercely independent older parent (been there) who refuses to accept your financial help, you can use this tax break — without mentioning its relatively small amount — in your argument to convince them to let you help.

Other financial considerations: As with most tax breaks, there are some other matters that come into play. The most common one is the taxpayer's income.

The Credit for Other Dependents begins to phase out when your income, as a single taxpayer, is more than $200,000.

The phaseout begins at $400,000 adjusted gross income for married couples filing a joint tax return.

But if you and your other dependents do qualify, be sure to claim this credit. As I noted, although it's not that much in the grand tax scheme, every tax break helps.

You can find more details and examples in IRS Publication 501, Dependents, Standard Deduction, and Filing Information, and IRS Publication 972, Child Tax Credit and Credit for Other Dependents.

Or you can use a couple of IRS online tools. There's one that helps you determine who you can claim as a dependent, and another interactive assistant that helps you determine if a person qualifies you for the Child Tax Credit or the Credit for Other Dependents.

IRS Form 14815 also lists the documents you'll need to claim either the CTC or ODC.

Finally, as I noted in yesterday's post on how families are spending their advance CTC payments, all my posts this Thanksgiving/National Family Week will look at family-related tax matters. If you need a break from yours (no judging; been there, too!), pop on over and check them out.

You also might find these items of interest:

• 4 family-friendly tax credits
• Tax help to take care of aging (and injury prone) parents
• Expanded child tax credits help families and U.S. economy, say studies

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