Whose Child Is This?

January 9, 2006

Beginning this year, the IRS has revised the definition of a child for the purposes of determining eligibility for dependency exemptions, the Earned Income Tax Credit (EITC), child tax credits, dependent care deductions, and ‘head of household’ filing status. From The Herald Standard:

Relationship, residency, age and support tests are used to determine if someone is a qualifying child.

In general, all four tests must be met. However, the support test does not apply to the EITC.

Under the relationship test, a child must be the taxpayer’s child (including an adopted child, stepchild or foster child), brother, sister, stepbrother, stepsister or a descendent of one of these relatives. An adopted child includes one lawfully placed with the taxpayer for legal adoption, even if the adoption is not final. A foster child is one placed with the taxpayer by an authorized placement agency or by court order.

Under the residency test, a child must live with the taxpayer for more than half of the year. Temporary absences for special circumstances (such as for school, vacation, medical care, military service, or detention in a juvenile facility) count as time lived at home.

Under the age test, a child must be under a certain age, which varies with the tax benefit.

Under the support test, a child cannot have provided over half of his or her own support.

You can read the story in its entirety here with further details on the new policy.

The moral of the story is that the more special exemptions, deductions, and credits written into the tax code, the more complex rules that define qualifications for these special provision must also be. This requires that those whom lawmakers claim to be helping by implementing these special provisions must either become experts in tax law or increasingly rely on paid tax preparers if they wish to benefit.

Partly for this reason, today roughly 85 percent of all individual tax returns are prepared using computer software (either by the taxpayer or a paid provider), and only about 15 percent are prepared manually according to IRS figures.

For more on the complexity and the compliance costs associated with the federal tax system, click here.

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