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Know your dependents and filing status. As cute as they are, puppies don’t count.

Here’s a fundamental truth that the tax industry has grown to accept as dogma, “No simple thing can ever be simple.” Of course, I take issue with that. And I’m not alone. Several other notable tax writers have highlighted the over-jargonization and what I call the “blah” factor.

And tax professionals love this. If I can convince you that what you think you know is actually a lay-man impression of a complex reality that can have dire effects on your personal wealth and happiness, do you think you would give me an hour of your time? I would guess, yes.

For that reason, I’m launching a mini series, titled Simple Truths. In it, I will cover basics, what I consider Tax 101 and I’ll try to equip the reader with tax tools that you can use to navigate other tax concepts or parts of the tax code.

The first, and easiest, in my opinion, covers dependents. Dependents can be a grey area in cases where you may have a two-house family, an elderly live-in relative, or in mixed families. The most common issue arises when two parents living in separate households claim the same qualifying child as a dependent. This happens all the time. So critical is this issue that courts will often rule on how parents will claim their children for tax purposes.

To keep to the concept of simple truths, let me lay some groundwork around filing status and how dependents can matter here.

  • The amount of the Standard Deduction one can take is based on filing status, which can be affected by whether you have dependents or not. For example, with dependents a single individual would be considered a head of household.
  • For 2016, a single taxpayer receives a standard deduction of $6,300 while heads of households receive $9,300 and that is before exceptions for the dependents.
  • An individual qualifies for head of household status if she or he satisfies the following conditions:
  1. Filing – the individual may not file as surviving spouse (random)
  2. Marital status – A married person does not qualify
  3. Household maintenance – the individual covers more than 50% of costs of the household

In addition, the second critical step is to determine personal exemptions. The personal exemption works similar to the standard deduction in that the personal exemption reduces your taxable income for no reason of your own. The 2016 personal exemption is $4,0250. Personal exemption are allowed for the taxpayer as well as qualifying dependents (specifically, either qualifying child or qualifying relative).

A child can generally be a qualifying child if the four tests are met:

  1. Relationship – The child must be the taxpayer’s son, daughter, stepdaughter, etc
  2. Age – The child must be under 19 or as a full-time student, 24 but now older
  3. Residence – The child must have lived with the taxpayer for more than half the year
  4. Non Self-Supporting – the last check is whether the child is self-sufficient and able to provide for half or more of his/her support.

A table illustrating the different rat below.

Table 2. 2016 Standard Deduction and Personal Exemption (Estimate)
Filing Status Deduction Amount
Single $6,300.00
Married Filing Jointly $12,600.00
Head of Household $9,300.00
Personal Exemption $4,050.00

Source: https://taxfoundation.org

In conclusion, having kids can be a tax hack in addition to a blessing. If you take care of an elderly relative who lives in your home, consider discussing taxes with a professional about what makes the most sense for. Often, what works for one person, doesn’t for others and vise versa. Chances are this won’t change what you do day-to-day, however, these are good basics to know well before tackling other key issues.

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