Tax Definition of Child Exemption

by JanettaLevin

The child exemption is a personal exemption allowed as a tax deduction on the individual tax return and it is applied against the taxpayer's income in the taxable income calculation. Claiming personal exemptions on the tax returns may result in a lower taxable income subject to the lower tax rates.

Facts

The personal exemption is allowed for the individual taxpayer, the taxpayer's spouse, children and other dependent relatives. Each personal exemption normally translates into a fixed dollar amount allowed as a deduction on the tax return and it varies each year due to being indexed for the inflation. In order to determine whether you are eligible to claim a child exemption, specific tax rules should be followed and IRS tests should be met. A child exemption may be subject to a phase down depending on the individual adjusted gross income (AGI). IRS advises to use a Worksheet for Determining the Deduction for Exemptions to compute the portion of the exemption that is not subject to the phaseout and can be deducted on your tax return.

Definitions

Child exemption is a personal exemption that can be taken for a dependent child. The term “dependent child” means “a qualifying child”. The exemption for a qualifying child can be made only if the three tests are met: dependent taxpayer test, joint tax return test and citizen or resident test. If you claim someone as a dependent on your tax return, this person or a child with a filing requirement cannot claim their own exemption on their personal tax return.

Tests

You cannot claim a child or other dependent exemption if you and your spouse are filing jointly and one of you can be claimed as a dependent on another taxpayer’s tax return. Even if your child meets the test of a “qualifying child”, since you cannot claim this child as your dependent, you cannot take advantage of a child exemption on your tax return. You cannot claim a child exemption for a married child who is filing jointly with his or her spouse. You can only claim a child exemption if a child is a U.S. citizen, U.S. resident, U.S. national or a resident of Canada or Mexico for some part of the year.

Eligibility

According to the IRS Bulletin 501, to meet the test of a “qualifying child”, the child must meet the following six tests: relationship, age, residency, joint tax return, support and a test for qualifying child of more than one person. A qualifying child must be your son, daughter, adopted child, stepchild, brother or sister. At the end of the year, the child must be under age 19 or under age 24 and be a full-time student. If a child is permanently disabled, age test is automatically met. The child must also meet a residency test and to live with the taxpayer for more than six months in the tax year concerned. The child should not have provided more than fifty percent of his own support. If the child meets the “qualifying child” test for more than one taxpayer, you have to be the taxpayer entitled to claim the child as a qualifying child.

Considerations

If parents are divorced or separated, it may get complicated when figuring out who is eligible to claim a child exemption. Sometimes, a custodial parent may choose to sign a court document to allow a non-custodial parent to claim a child exemption for the dependent child. In reality, it is almost impossible to determine in advance which parent will benefit more from a child exemption claim. In "Credits and Exemptions for Children", author Elaine Maag points out that "the dependent exemption has no value until income exceeds $12,000--the point where the parent would first owe tax, absent the exemption."

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