Has the TCJA changed the definition of a dependent for children with special needs?

Historically, claiming a dependency exemption on Form 1040, U.S. Individual Income Tax Return, required little to no thought. Before 2018, individual taxpayers simply claimed exemptions for themselves, their spouses, and their children.

But what if a dependent child with special needs is totally and permanently disabled? In addition, what if that same dependent is collecting Supplemental Security Income (SSI)? Changes that have occurred over the past decade may surprise financial and tax advisers. This article provides an overview of the rules defining a dependent and addresses the issue of a child’s receipt of SSI.

Suspension of exemptions

As of Jan. 1, 2018, taxpayers are no longer permitted to claim personal or dependency exemption deductions on their tax returns. The law known as the Tax Cuts and Jobs Act (TCJA) of 2017, P.L. 115-97, suspended the exemption deduction through 2025. However, understanding the definition of a dependent is still critical for tax planning.

In general, having a “dependent” (with a nondeductible indexed exemption amount of $4,150 for 2018 and $4,200 for 2019 when determining a qualifying relative, head-of-household filing status, and the $500 tax credit for other dependents (see Notice 2018-70 for the dependency exemption amount for other Code purposes)) requires that a taxpayer satisfy one of two tests: (1) a four-prong test for a qualifying child — relationship, abode, age, and support; or (2) a three-prong test for a qualifying relative — relationship, gross income, and support. (The TCJA added a $500 nonrefundable credit for a qualifying dependent other than a qualifying child (i.e., a 17-year-old qualifying child or a dependent parent); whereas the child tax credit of $2,000 only applies to a taxpayer’s qualifying child under the age of 17.)

In addition to the “relationship” and “age” tests explained below, the qualifying child must live in the same household as the taxpayer for more than half the tax year and cannot be self-supporting. The key differences between the requirements for a qualifying child and those for a qualifying relative are that a qualifying relative, if actually related, need not live with the taxpayer trying to claim the exemption but must satisfy the “gross income” test — i.e., the dependent’s gross income cannot exceed the “exemption” amount of $4,200 for 2019 (Notice 2018-70).

Furthermore, the “support” test is different. For qualifying relative status, in addition to the person’s not being self-supportive; the taxpayer must actually provide more than half of the dependent’s support (food, lodging, clothing, education, medical and dental care, recreation, transportation, lodging, and similar necessities). (See Publication 501, Dependents, Standard Deduction, and Filing Information.) For both a qualifying child and a qualifying relative, if married, the dependent cannot file a joint return for the year unless the sole purpose for filing is to claim a refund, and the dependent must be a U.S. citizen, resident alien, or national, or a resident of Canada or Mexico.

With passage of the Working Families Tax Relief Act of 2004, P.L. 108-311, effective 2005, the qualifying child and relative definition was clarified to provide a uniform definition for the dependency exemptions, child tax credit, dependent care, and earned income tax credits (Sec. 152(a)). Under this definition, in addition to meeting the relationship test (taxpayer’s child, stepchild, or descendent (e.g., grandchild); eligible foster child; or brother, sister, or descendent (e.g., niece or nephew)), a qualifying child must meet any one of the following three requirements (Sec. 152(c)): (1) the “child” must be under the age of 19 at year end; (2) the “child” must be a full-time student under the age of 24 at the end of the year (qualifying “students” must be enrolled as a “full-time” student during any part of five calendar months during the year); or (3) the individual must be totally and permanently disabled at any time during the year (Sec. 152(c)(3)(B)).

It is equally important to consider that grandparents, uncles, aunts, brothers, and sisters satisfy this “relationship” test and, therefore, may be allowed to claim the benefits associated with having a dependent (e.g., head of household filing status and/or the $500 credit for other dependents) for a qualifying child who is totally or permanently disabled, regardless of the age of that child (Sec. 152(d)(2)).

‘Dependent’ receiving SSI

The receipt of SSI may result in the loss of dependent status for a child who is totally and permanently disabled (i.e., an adult child with special needs). However, the loss of the dependent status may depend on qualifying child or qualifying relative status. Children qualifying for SSI can receive a maximum federal benefit of $771 a month for 2019, with most states providing an additional stipend.

The key to having a child qualify as a dependent can be found in meeting the conditions for the aforementioned support test. To comply with the support requirement, the dependent child must not have provided more than half of his or her own support. Needs-based support, such as SSI, is not included as income nor counted as support provided by a qualifying child for this test. In addition, it is critically important to remember that qualifying child status also requires a residency requirement that is not required under the qualifying relative test; the qualifying child must live in the same household as the taxpayer for more than half the tax year.

By contrast, SSI is counted as support under the qualifying relative test. As a result, if a taxpayer’s special needs child’s sole source of income is SSI, the “dependent’s status” will not be jeopardized under the qualifying child test, but requires further examination under the qualifying relative test as to whether the individual seeking dependent status has provided more than half of the qualifying relative’s support.

A change affecting siblings

Furthermore, while Sec, 152(c)(3) was amended effective for 2009 to require that the qualifying child be younger than the individual claiming the dependency exemption, this rule does not apply to a child who is permanently and totally disabled. Age is simply not relevant in determining the dependency exemption (nor the status as dependent under current law) of an individual who is totally or permanently disabled. As illustrated under the legislation implementing this change, a taxpayer was permitted to claim a dependency exemption for an older sibling for years prior to 2009. This option no longer applies as of 2009 unless the older sibling is permanently and totally disabled.

Thomas M. Brinker Jr., CPA/PFS, CGMA, J.D., LL.M., ChFC, CFE, AEP, is professor of accounting at Arcadia University in Glenside, Pa. He also serves as director of the MassMutual Center for Special Needs Planning at The American College of Financial Services in Bryn Mawr, PA.  To comment on this article or to suggest an idea for another article, please contact Sally Schreiber, senior editor, at Sally.Schreiber@aicpa-cima.com.