How Much Does a Dependent Reduce Your Taxes?

Depending on your situation, it could be a lot

Can you claim a dependent on your tax return? If so, several federal tax breaks—including the earned income tax credit (EITC) and child tax credit (CTC)—could help lower your tax bill or even increase your refund. Here's a quick look at who qualifies as a dependent and how claiming one can affect your income tax return.

Key Takeaways

  • A dependent for income tax purposes can be either a qualifying child or a qualifying relative, such as a sibling or parent.
  • An individual can be a dependent of only one taxpayer per tax year.
  • The American Rescue Plan expanded the child tax credit and made it fully refundable for the 2021 tax year, meaning you could get a refund even if you don't owe any taxes.
  • The earned income tax credit (EITC) is a refundable tax credit of up to $3,618 for one dependent, $5,980 for two dependents, and $6,728 for three or more dependents for the 2021 tax year.

What Is a Qualified Dependent?

A dependent is someone for whom you provide at least half of their financial support during the year—for household expenses, medical care, education, clothing, and the like. If you have a dependent, you may qualify for several tax benefits that could save you money at tax time.

An individual can be a dependent of only one taxpayer for a tax year. To qualify as a dependent, the person must:

  • Be a U.S. citizen, U.S. national, resident alien, or a resident of Canada or Mexico
  • Have a valid taxpayer identification number (TIN), such as a Social Security number
  • Not have filed a joint tax return for the year
  • Not take a personal exemption (if available for the tax year) or claim someone else as a dependent

A provision in the Tax Cuts and Jobs Act eliminated the personal exemption, which remains at $0 for tax years 2021 and 2022, as it was for 2020.

Types of Dependents

Though all dependents must meet the general requirements listed above, you can't claim someone as a dependent unless they are your qualifying child or qualifying relative. The IRS uses different "tests" to determine who qualifies.

What Are the Tests for a Qualifying Child?

Someone can't simply be a kid to be considered a qualifying child. According to the IRS, a person must satisfy five tests to be your qualifying child:

  1. Relationship test. To meet this test, the person must be your child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of any of them.
  2. Age test. The person must be (a) under age 19 at the end of the tax year, (b) under 24 if they're a full-time student and younger than you, or (c) any age if they're permanently and totally disabled.
  3. Residency test. The person must share a principal residence with you for more than half the tax year. Exceptions apply for circumstances like temporary absences (e.g., for illness, education, or vacation) or the birth or death of a child during the year.
  4. Support test. The person must provide less than half of their own support for the year.
  5. Joint return. The person must not file a joint return for the year (unless they file only to claim a refund of income tax withheld or estimated tax paid).

What Are the Tests for a Qualifying Relative?

Likewise, a qualifying relative isn't simply someone to whom you're related. Instead, the person must satisfy four tests to be a qualifying relative:

  1. Not a qualifying child test. To meet this test, the person can't be your qualifying child or another taxpayer's qualifying child.
  2. Member of household or relationship test. The person must live with you all year as a household member. Otherwise, they must be related to you as your child, stepchild, foster child, or a descendent of any of them; your sibling, including half-siblings and stepsiblings; your parent, stepparent, grandparent, or another direct ancestor (but not a foster parent); your aunt, uncle, niece, or nephew; or your daughter-in-law, son-in-law, mother-in-law, father-in-law, sister-in-law, or brother-in-law.
  3. Gross income test. The person's gross income for the year must be less than $4,300 ($4,400 for 2022). An exception applies if the person is disabled and has income from a sheltered workshop.
  4. Support test. You must provide more than half of the person's total support for the year.

Children of Divorced or Separated Parents

In the case of divorced or legally separated parents, a child is generally the dependent of the custodial parent—the one the child lived with for the greater number of nights during the year. If both parents had equal time during the tax year, the parent with the higher adjusted gross income (AGI) can make the claim.

The American Rescue Plan Act of 2021 changed the child tax credit (CTC). For the 2021 tax year, the child tax credit is fully refundable and increases to $3,000 for children ages 6 to 17 and $3,600 for those under 6. The credit starts to phase out at $75,000 for single filers, $112,500 for heads of households, and $150,000 for married couples filing jointly.

Tax Benefits of Having a Dependent

A tax credit reduces the amount of tax you owe on a dollar-for-dollar basis. On the other hand, a tax deduction lowers your taxable income, so you owe less tax. Of the two, tax credits are more favorable because they can save you more money. You can claim several tax credits and deductions if you have a dependent.

Here's a rundown of the most common credits and deductions:

Child Tax Credit (CTC)

The child tax credit (CTC) is a tax benefit granted to taxpayers for each qualifying dependent child. The American Rescue Plan increased the child tax credit for 2021 from $2,000 per qualifying child to:

  • $3,600 for children ages five and under at the end of 2021
  • $3,000 for children ages six through 17 at the end of 2021

The $500 nonrefundable credit for other dependents remains unchanged for the 2021 tax year.

The child tax credit is gradually reduced to $2,000 per child if your modified AGI exceeds:

  • $150,000 if you're married filing jointly or filing as a qualified widow or widower
  • $112,500 if filing as head of household
  • $75,000 if you're a single filer or married filing separately

The credit can be reduced to below $2,000 per child if your modified AGI exceeds $400,000 if you're married filing jointly or $200,000 for all other filing statuses.

The child tax credit reverts to $2,000 for the 2022 tax year. Also, though the credit is fully refundable for the 2021 tax year, it goes back to being partially refundable for 2022.

Earned Income Tax Credit

The earned income tax credit (EITC) is a refundable tax credit that helps lower-income taxpayers reduce the amount of tax owed on a dollar-for-dollar basis. Though the credit is available to taxpayers who don't have children, those with dependents will receive a higher credit. Here's a look at the EITC AGI limits and maximum credit amounts for 2021:

EITC for 2021
 Dependents Single or Head of Household Married Filing Jointly Maximum EITC
0 $21,430 $27,380 $1,502
1 $42,158 $48,108 $3,618
$47,915 $53,865 $5,980
3+  $51,464 $57,414 $6,728

Child and Dependent Tax Credit

The child and dependent care credit provides relief to individuals and spouses who pay for the care of a qualifying child or disabled dependent while working or looking for work. You can include up to $8,000 of eligible expenses if you have one qualifying dependent, or up to $16,000 for two or more dependents when calculating the credit.

The percentage of those expenses allowed as a credit depends on your income (and your spouse's if you file a joint return). The maximum percentage for 2021 is 50%, which is available to every eligible taxpayer with an AGI of $125,000 or less. As your AGI climbs, the credit is eventually reduced to $0. If your AGI is $438,000 or higher, you won't get the credit.

For 2021, the child and dependent care credit is worth up to $4,000 for one dependent and up to $8,000 for two or more.

Student Loan Interest Deduction

The student loan interest deduction allows you to deduct up to $2,500 of the interest you paid on a student loan during the tax year. For example, if you fall into the 12% tax bracket and claim the full amount, the deduction would reduce your tax for the year by $300 ($2,500 × 12%). If you paid less than $2,500 in student loan interest, your deduction is capped at the amount you paid.

The student loan must be taken out for you, your spouse, or your dependent, which can be a qualifying child or a qualifying relative. For 2021 and 2022, the deduction gradually phases out if your modified AGI (MAGI) is between $70,000 and $85,000 and you file as single, head of household, or a qualifying widow or widower. If you file a joint return, the deduction phases out between $140,000 and $170,000 for 2021, rising to $145,000 to $175,000 for 2022. You can't claim the deduction if your MAGI is above the maximum.

American Opportunity Tax Credit

The American opportunity tax credit (AOTC) helps offset the cost of the first four years of a student's postsecondary education. The credit allows a maximum annual tax credit of $2,500 per eligible student for qualified education expenses. If the credit brings your tax bill to $0, you can get a refund of up to 40% of the remaining credit (up to $1,000).

Room and board, medical expenses, and insurance—or any qualified expenses paid for with 529 plan funds—don't count as qualified education expenses.

Either the student or someone who claims the student as a dependent can take the AOTC on their income tax return. For 2021, your MAGI must be $80,000 or less ($160,000 if filing jointly) to claim the full credit. The credit begins to phase out if your MAGI is between:

  • $80,000 and $90,000 for single filers
  • $160,000 and $180,000 for joint tax filers

You can't claim the credit if your MAGI is above those thresholds.

Medical and Dental Expenses Deduction

You may be able to deduct certain out-of-pocket expenses you paid for medical and dental care for yourself, your spouse, and your dependents (i.e., a qualifying child or a qualifying relative). As far as the IRS is concerned, medical expenses are the costs of "diagnosis, cure, mitigation, treatment, or prevention of disease."

Starting in 2021, the deduction applies only to expenses that exceed 7.5% of your income. So, if your AGI is $50,000, you can claim the deduction for medical expenses that exceed $3,750 ($50,000 × 7.5%).

Head of Household Status

In addition to the numerous tax credits and deductions, you may qualify for head of household status if you have a dependent. Taxpayers who file as heads of household have a higher standard deduction and a lower marginal tax rate than single filers—both of which can lower your taxes. For example, the standard deduction for the 2021 tax year for single filers is $12,550, while it's $18,800 for heads of households.

To file as head of household, all of the following statements must be true:

  • You were unmarried on the last day of the year.
  • You paid more than half the cost of keeping your home for the year.
  • A qualifying person lived with you in the home for more than half the year (except for temporary absences). If the qualifying person is your parent, they don't need to live with you.

Can I Claim the Child Tax Credit, EITC, and the Child and Dependent Care Credit?

Yes. As long as you meet the qualifications for each credit, you can claim all three on your income tax return.

Who Qualifies for the Child and Dependent Care Credit?

You can claim the child and dependent care credit if you paid a person or an organization to care for your dependent under the age of 13 (e.g., your child) or a dependent of any age or your spouse who can't care for themselves and lives with you for at least half of the year.

What Is the Deadline for Filing My 2021 Tax Return?

Your 2021 tax return is due Monday, April 18, 2022. You can get an automatic six-month extension by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

What Is the Difference Between a Tax Credit and a Tax Deduction?

A tax credit directly lowers the amount of tax you owe, while a tax deduction reduces your taxable income (the amount of income on which you owe taxes). Tax credits are more favorable because they save you more money on your tax return. For example, a $1,000 tax credit lowers your tax bill by that same $1,000. Conversely, a $1,000 tax deduction reduces your taxable income by $1,000. So, if you fall into the 22% tax bracket, that $1,000 deduction would save you $220 ($1,000 × 22%).

The Bottom Line

If you can claim a dependent on your tax return, numerous tax credits and deductions could help lower your tax bill or increase your refund. It's possible to save thousands of dollars at tax time if you claim all the tax breaks to which you're entitled. Be sure to consult a tax professional if you need help determining your eligibility or filing your return.

Article Sources
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