Many, if not most, empty nesters are probably glad to have their adult children return to live with them for a while.
But if it turns out to be a long time, come tax time, you might be tempted to put down your child as a dependent, which may not work out so well if the IRS determines that he or she doesn’t meet the rules that decide who is considered a taxpayer’s dependent. Or – although this is unlikely – you could find that supporting your child means your tax bill is more expensive due to triggering the gift tax.
There is a good reason to put your adult child down as a dependent, or what’s known as a “qualifying relative,” if you’re financially supporting him or her. While the Tax Cuts and Jobs Act, passed in 2017, removed the $4,050 personal exemption that you could claim for yourself and your dependents (they will return in tax year 2026), you can claim the “credit for other dependents,” often unofficially referred to as the “family tax credit.”
On the other hand, no need to despair if you can’t claim your adult child as a qualifying relative. The credit for other dependents is only $500.
- Age matters when classifying dependents.
- Your adult child must live with you.
- Your adult child can’t be earning much money.
- You need to be paying for over half of their support.
- Your adult child can’t file a joint return with a spouse if he or she is a dependent.
- Your adult child can’t be filed as a dependent by you and someone else.
- Be aware of, but do not fear, the gift tax rule.
Age Matters When Classifying Dependents
More specifically and typically: “To claim your child as your dependent, they must be under age 19 or a full-time student under age 24,” says Josh Zimmelman, owner and founder of Westwood Tax & Consulting in New York City.
Once a kid turns 24, or if a 19-year-old elects to not get a higher education, things get a little trickier with the definition of dependent. If that’s the case, some of the following rules become very important.
Your Adult Child Must Live With You
Not a surprising rule. But you’ll want to be aware that your adult child should have lived at least half the year in your home to declare them as a dependent, Zimmelman says.
And before you jot down your kid as a dependent, there are numerous other boxes that you’ll need to check off first.
Your Adult Child Can’t Be Earning Much Money
Their total taxable gross income from all jobs – what he or she made before taxes – needs to be less than the personal exemption amount of the year you’re claiming them in. In 2019, that was $4,200.
You Need to Be Paying for Over Half of Their Support
Which, yes, is very frustrating if the math works out so that you pay, say, 40% of your kid’s expenses. Even 50% means you can’t classify your adult kid as a dependent. It needs to be over half.
Your Adult Child Can’t File a Joint Return With a Spouse If He or She Is a Dependent
There is one exception: if the reason for filing the return is to claim a refund of overpaid taxes.
Your Adult Child Can’t Be Filed as a Dependent by You and Someone Else
This could be your spouse or ex-spouse or your kid’s in-laws. If your adult child lived under two roofs in a year or had multiple people offering financial support, you can see why two taxpayers might feel they can claim the same adult as a dependent.
Be Aware of, But Do Not Fear, the Gift Tax Rule
If you paid more than $15,000 to your adult child in 2019, you’ll want to be aware of that rule. But don’t panic if you’re doing the math and thinking that with the rent-free room you gave your kid, and the food you bought, the total easily surpasses $15,000.
“If you let your adult child or children live in your home rent-free, or make them dinner every night, that’s not something the IRS really cares about,” Zimmelman says. “However, if you transfer a valuable asset like property or a car or give them large amounts of money, that is considered a gift.”
But even there, you probably don’t need to pay a gift tax – you just need to file a gift tax return, says Bishop Toups, a tax attorney in Venice, Florida.
“If you give more than $15,000 per year, you will very likely not have to pay any taxes. The gift tax limit is currently $11.58 million,” Toups says. “So let’s say you give your adult child $20,000 in one tax year, you will not owe any gift taxes unless you’ve made more than $11.58 million worth of gifts in your lifetime.”
But, again, if you gave your adult child $20,000 in the form of cash or, say, a car, you need to report it via Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return.
And depending where you live, you may not have to worry about the gift tax at all. “Each state has different gift tax rules,” says Paul Miller, a certified public accountant who owns Miller & Company LLP, a CPA firm in New York City. As he points out, New York state doesn’t have a gift tax.
And there are a lot of ways you can financially support a child that wouldn’t be counted toward a gift tax, says Steven Weil, enrolled agent and president and tax manager of RMS Accounting, a tax firm in Fort Lauderdale, Florida.
“Payments made on behalf of an adult child, or any other person for that matter, directly to a college for tuition or to a doctor or other medical provider for medical services on behalf of someone else are not included for gift tax,” he says. “Neither would buying and paying your adult child’s medical insurance be included as a taxable gift.”
That said, you’ll want to make those payments to the hospital, the college and so on, directly, rather than give it to your kid to make those payments.
But the bottom line: If your kids are living with you and still need your help, you can help them without worrying about the IRS frowning on it.
“The IRS is built on the honor system,” Miller says. “In my experience, the IRS isn’t questioning letting your child live in your home, feeding them or using a cellphone.”