Thanks to a recent tax simplification law designed to clarify who can claim a child as a dependent, some upper-income families with both younger children and older "boomerang" kids living at home could benefit from an unintended loophole.
One leading tax expert predicts that Congress will likely shut it down once the embarrassing gaffe becomes widely known. But it is unlikely any congressional action would affect 2005 returns due this year.
Under the old rules, to claim a child as a dependent and get the benefit of the $3,200 personal exemption and the $1,000 child tax credit for those younger than 17, you had to provide more than half of that person's support. But now a sibling can claim a brother or sister as a dependent even if he or she doesn't pony up one dime for support -- as long as the parents don't also claim the child as a dependent.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The new definition of a qualifying child is also the key for claiming head-of-household filing status and the earned-income tax credit for low-income families.
Kathy Burlison, director of tax implementation for HR Block, says the big winners of this accidental tax break are upper-income families who lose the benefit of the child tax credit when their joint income exceeds $110,000 and even wealthier families whose ability to claim personal exemptions is phased out once their joint income tops $218,950. "The key message here is sometimes you have to look not just at your own tax return, but that of your whole household for tax saving opportunities," she says.
To illustrate, Burlison cites the example of a married couple with $240,000 of income and two children, Larry, 21, and Gail, 15. Larry is not in school and earned $13,000 last year, so he can't be claimed as a dependent because of his age. (If he were a full-time student, he could qualify as a dependent through age 24.) Under the new rules, Gail can be claimed as a dependent child by either her parents or by her brother.
Because of their income, the parents get no child credit for Gail, and her dependency exemption is squeezed, resulting in a tax savings of $866. But if Larry claims his sister as a dependent, he qualfies for tax savings of nearly $3,500, thanks to the dependency exemption, child credit and an earned-income credit worth $2,662. It may be legal, but is it right?
"It appears that this approach is allowed under the current law, even though it obviously isn't the intended result," says tax expert Kaye Thomas of Fairmark.com. "But to see thousands of dollars in tax benefits going to kids living at home with upper-income parents is just bizarre."
-
AI Stocks Lead Nasdaq's 398-Point Nosedive: Stock Market TodayThe major stock market indexes do not yet reflect the bullish tendencies of sector rotation and broadening participation.
-
Top Tech Gifts to Grab at Walmart Before ChristmasBig savings on Apple, Bose, HP, Vizio and more while there's still time to shop.
-
AI Appliances Aren’t Exciting Buyers…YetThe Kiplinger Letter Artificial intelligence is being embedded into all sorts of appliances. Now sellers need to get customers to care about AI-powered laundry.
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
Tax Refund Alert: House GOP Predicts 'Average' $1,000 Payouts in 2026Tax Refunds Here's how the IRS tax refund outlook for 2026 is changing and what steps you can take now to prepare.
-
New IRS Changes to FSA Contribution Limits for 2026: What to KnowHealth Care Flexible Spending Accounts have tax advantages worth looking into, especially in light of new IRS changes.
-
Is a New $25,000 Health Care Tax Deduction Coming in 2026?Tax Policy A proposal from GOP Sen. Josh Hawley adds to the chatter about health care affordability.
-
3 Ways High-Income Earners Can Maximize Their Charitable Donations in 2025Tax Deductions New charitable giving tax rules will soon lower your deduction for donations to charity — here’s what you should do now.
-
An HSA Sounds Great for Taxes: Here’s Why It Might Not Be Right for YouHealth Savings Even with the promise of ‘triple tax benefits,’ a health savings account might not be the best health plan option for everyone.
-
10 Retirement Tax Plan Moves to Make Before December 31Retirement Taxes Proactively reviewing your health coverage, RMDs and IRAs can lower retirement taxes in 2025 and 2026. Here’s how.
