Do children living with you who pay substandard rent but pay their own taxes considered dependent upon you?

[xmasbaby0]

Your child's rent is not the determining factor as to whether you can claim them as a dependent.   If the child is not a student under the age of 24, then the determining factor is whether they had over $4300 of income.  If they did, then you cannot claim them as a dependent.

https://ttlc.intuit.com/turbotax-support/en-us/help-article/tax-credits-deductions/claim-dependent/L...

[Carl]

For a child under the age of 19 on Dec 31 of the tax year, their earnings do not matter. What does matter is support. If the child (not you) did not pay more than 50% of their own support, they qualify as your dependent.

For a child under the age of 24 on Dec 31 of the tax year *AND* a full time student for any one semester that started during that tax year, that same rule applies and again, their earnings do not matter.

If the child was 19-23 on Dec 31 of the tax year and was "not" a full time student for any one semester that started during the tax year, then the earnings requirement comes into play. If they earned more than $4,300 during the tax year, they do not qualify as your dependent.

[Hal_Al]

Q. Can children living with you who pay substandard rent but pay their own taxes be your  dependent for taxes?

A. Probably not, but it depends on more detail. 

There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test. Only a QC qualifies a taxpayer for the Earned Income Credit and the Child Tax Credit. They are interrelated but the rules are different for each.

The support test is different for each type. The support test, for a QC, is only that the child didn't provide more than half his own support. The support test for a Qualifying Relative is that the taxpayer provided more than half the relative's support.

Since they "pay their own taxes", they almost certainly have too much income (over $4300) to be a Qualifying Relative Dependent.  So, you look next to see if they can be a QC. 

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
2. He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
3. He lived with the parent (including temporary absences such as away at school) for more than half the year

So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self.

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf