Does your mother-in-law live with you? This is the tax credit you’ll want to know about

For 2018-2015, the Tax Cuts and Jobs Act (TCJA) established a new $500 tax credit for dependents who are not an under-age-17 child who qualifies for the more-generous $2,000 child tax credit. However, these non-qualifying-child individuals must pass an income test to be classified as a dependent, and there was a big question about that.

The same income test issue is relevant for determining whether you can qualify for beneficial head of household filing status based on having a non-qualifying-child dependent.

Thankfully, the IRS has released good news on the question. Here’s what you need to know as you get ready to confront your 2018 Form 1040.

A qualifying dependent for purposes of claiming the $500 credit can include a dependent child who lives with you for over half the year and is over age 16. Other qualifying individuals include dependent grandchildren, siblings, stepbrothers, stepsisters, fathers, mothers, grandfathers, grandmothers, stepfathers, stepmothers, nieces, nephews, uncles, aunts, sons-in-law, daughters-in-law, fathers-in-law, mothers-in-law, brothers-in-law, and sisters-in-law. For you to be eligible for the $500 credit, you must provide over half of the person’s support for the year, and he or she must be a U.S. citizen, U.S. national, or U.S. resident. Individuals who are not relatives can also be qualifying dependents if they meet the preceding requirements and live with you as a member of your household for the year.

However, it was unclear if one of these individuals would make you eligible for the $500 credit if the person had any gross income for the year. That’s because the Tax Code says a person cannot have gross income in excess of the dependent exemption deduction amount to be classified as your dependent. This restriction is called the income test. For 2018-2025, the dependent exemption deduction is deemed to still exist, but it equals $0. So if a dependent could pass the income test only if he or she has no gross income, eligibility for the $500 credit would be pretty rare.

Good News: IRS Notice 2018-70 favorably resolves the income test question. According to the Notice, a dependent will pass the income test for 2018 if he or she has gross income of no more than $4,150. For 2019, the gross income limit goes up to $4,200. These amounts are what the dependent exemption deductions would have been for 2018 and 2019 in the absence of the TCJA. So for 2018, your non-qualifying-child dependent passes the income test if his or her gross income is $4,150 or less. Ditto for 2019 if that person’s gross income is $4,200 or less.

Tax return advice: Claim your rightful $500 credit(s) on Page 2, Line 12a of Form 1040.

A common — and expensive — error is filing as a single taxpayer when more beneficial head of household (HOH) filing status is available. Compared to single taxpayers, heads of households are entitled to wider tax brackets and bigger standard deductions. So, using HOH filing status can save you significant bucks. The dependent income test is important here too. Here’s why.

If you are unmarried and could claim a dependent exemption deduction for a relative, you are eligible for HOH filing status if you also pay over half the cost of maintaining a household that is the principal home for you and that relative for over half the year. Once again, the tax code stipulates that the dependent exemption deduction still exists for 2018-2015; it just equals $0. But the dependent exemption deduction is only allowed if the dependent relative passes the gross income test. For 2018, that means having gross income of no more than $4,150, according to the IRS. For 2019, that means having gross income of no more than $4,200. You must also pay over half of the relative’s support for the year.

For purposes of HOH filing status eligibility, the term “relative” means your brother, sister, stepbrother, or stepsister, father or mother or an ancestor of either, stepfather or stepmother, son or daughter of a brother or sister, brother or sister of your father or mother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

You can also claim HOH filing status based on having a dependent non-relative if that person has the same principal place of abode as you for the tax year and is a member of your household for that year. The dependent non-relative must also pass the income test, and you must pay over half of his or her support for the year.

Example: You are unmarried. In 2018, you paid over half the support for your beloved but sadly-unmotivated 26-year-old nephew who had minimal income for the year. He lived in your basement for nine months of the year, and (needless to say) you paid over half the cost of maintaining the household that you and he shared. For 2018, your nephew is a qualifying dependent relative for purposes of both the $500 dependent credit for HOH filing status eligibility. Prepare your 2018 Form 1040 accordingly.

Tax return advice: Claim your rightful HOH filing status by checking the box at the top of Page 1 of Form 1040.

A non-qualifying-child dependent can make you eligible for the $500 tax credit for 2018 as long as his or her gross income is less than $4,150, or for 2019 if his or her gross income is $4,200 or less. If you are unmarried, that person can also make you eligible for beneficial HOH filing status. Since the actual Tax Code language does not permit you to reach these taxpayer-friendly conclusions, we should take the unusual step of saying: “Thank you IRS.”

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