Qualifying Relative

Definition

A qualifying relative is a term used in the United States tax system to describe a person who is eligible to be claimed as a dependent by another taxpayer, provided certain criteria are met. The qualifying relative must have a specific relationship to the taxpayer, such as a child, sibling, or parent, and their income must be below a certain threshold for the tax year. Additionally, the taxpayer must provide more than half of the qualifying relative’s financial support.

Phonetic

The phonetics for the keyword “Qualifying Relative” is:Kwəˈlīfī-ing rəˈlātiv

Key Takeaways

1. A Qualifying Relative is an individual who meets specific criteria set forth by the Internal Revenue Service (IRS) and can potentially be claimed as a dependent by taxpayers, allowing them to claim various tax deductions and credits.
2. For an individual to be considered a Qualifying Relative, they must pass four tests: (1) The individual cannot be the taxpayer’s Qualifying Child; (2) They must either be related to the taxpayer or live in the taxpayer’s household for the entire tax year; (3) Their gross income for the tax year must be below a specific amount determined by the IRS; and (4) The taxpayer must provide more than half of the individual’s total financial support during the tax year.
3. Claiming a Qualifying Relative as a dependent provides several tax benefits, including potential deductions and credits based on the caregiver’s dependency exemption or qualifier’s status. However, the exemption amount may have changed under the Tax Cuts and Jobs Act.

Importance

The term “qualifying relative” is important in the context of business and finance because it plays a crucial role in determining eligibility for tax benefits and deductions. It is a specific term defined by tax authorities, such as the Internal Revenue Service (IRS) in the United States, to identify family members or other dependents for whom taxpayers can claim valuable exemptions, deductions, or credits on their income tax returns. Identifying and accurately claiming qualifying relatives can significantly lower an individual’s tax burden, thereby promoting financial well-being and more efficient allocation of resources within families and households.

Explanation

A qualifying relative is a term primarily used in the context of tax filing and serves the purpose of determining an individual’s eligibility to claim a dependent on their income tax return. Establishing a qualifying relative allows taxpayers to claim valuable tax benefits, such as additional exemptions, tax deductions, and credits. This financial concept is not solely limited to immediate family members, as extended family members or even non-relatives can be considered as qualifying relatives in certain circumstances. The Internal Revenue Service (IRS) outlines specific criteria that must be met to qualify someone as a qualifying relative; these criteria include relationship or residency, gross income, and financial support provided.

In practical terms, a taxpayer providing support to someone who meets the criteria of a qualifying relative can experience a reduction in their taxable income, thus easing their overall tax burden. In order to prevent abuse of the tax code, the IRS has established strict guidelines, requiring the person being claimed as a qualifying relative to have an annual gross income below a specified threshold, live with the taxpayer, or be related to the taxpayer if not living together, and have more than half of their financial support provided by the taxpayer. Identifying and understanding who can be claimed as a qualifying relative is essential for taxpayers seeking to maximize their tax benefits, as well as ensuring they comply with IRS filing regulations.

Examples

A Qualifying Relative is an individual who meets specific criteria outlined by the Internal Revenue Service (IRS) that allows the taxpayer to claim them as a dependent on their tax return. This can provide certain tax benefits, such as a reduced tax liability, additional exemptions, or the ability to claim certain credits. Here are three real-world examples of situations in which a taxpayer can claim a Qualifying Relative:

1. Elderly Parent: A taxpayer is financially supporting their elderly parent who is living with them. Their parent’s gross income is below the IRS income threshold, and the taxpayer provides more than half of their support. In this case, the taxpayer can claim their parent as a Qualifying Relative, which may offer benefits such as additional tax exemptions and deductions.

2. Adult Child: A college graduate moves back in with their parents after graduation due to a challenging job market. They are unable to find a job and their income is below the IRS income threshold. The parents provide more than half of their child’s support (e.g., housing, food, medical care). As the child is not a Qualifying Child (due to their age), the parents can claim them as a Qualifying Relative, which can help reduce their tax liability.

3. Niece/Nephew: A taxpayer is providing significant financial support to their young niece or nephew due to the passing of the child’s parents. The child is also living with the taxpayer. As long as the child’s gross income is below the IRS threshold and the taxpayer provides more than half of their support, the taxpayer can claim their niece/nephew as a Qualifying Relative. This may offer tax benefits such as additional exemptions and deductions, or the ability to claim certain credits like the Child Tax Credit.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Dependency Exemption
• Gross Income Threshold
• Tax Household Status
• Support Test
• Residency Test

Sources for More Information

• Investopedia
• The Balance
• FreshBooks
• H&R Block